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NEW YORK 1935 

Copyright, 1935, by 

Harrison Smith and Robert Haas Inc. 

Printed and bound in the United States 

of America by H. Wolff 

M. H. W. 



America at the turn of the century Emerging from the de- 
pression of the Nineties "Full dinner-pail" a reality Farmer 
comes into his own again Large plans afoot in Wall Street 
The Old America Winning of the West Effects of im- 
migration American philosophy Individualism at its best 
and worst Uncle Sam becomes an animated dollar-mark 
Pendulum swings up again Good Times ahead. 


Forces that made the New America possible Coming of steam 
The Iron Horse Drift of young blood to big cities Mid- 
dle West emerges Era of ruthless competition John D. 
Rockefeller sees a light Standard oil is born Secret rebates 
and drawbacks Forging first of the Trusts Railroad dis- 
crimination Early railroads footballs of stock market Rail- 
roads and the public. 


"Green lights ahead" Mark Hanna and Big Business 
Gold standard adopted The tariff and the trusts Morgan 
financial overlord U. S. Steel Railroad reorganizations 
Morgan vs. Harriman A titanic struggle Panic of 1901. 

Roosevelt and Wall Street Northern Securities Case 



Settlement of the Coal Strike Struggle over Pure Food 
and Drug Act Hepburn Rate bill. 


Insurance scandals of 1905 Hyde, founder of Equitable, 
leaves control to 23-year-old son Gross mismanagement 
Pulitzer scents a story Factional struggle leads to Hyde's 
retirement Life Insurance Investigation Charles E. 
Hughes appointed counsel Improprieties revealed Exces- 
sive salaries and commissions Funds diverted to favored 
banks Political contributions Senators on payrolls New 
laws enacted Equitable mutualized 


Ten years after Boom times Speculation rife Morse 
banks in trouble Panic of 1907 Morgan to rescue Re- 
covery Results of panic Community of interest develops 
among big bankers Pujo investigation Morgan testifies 
His personal code of credit Taft Wilson Banking sys- 
tem reorganized Federal Reserve Act Pre-war America 
The automobile emerges. 


Profits of being a neutral The war boom "He kept us 
out of war" America girds itself We join the allies Last- 
minute preparations Lack of co-ordination Baruch to the 
fore War Industries Board Question of priorities 
Financing the war The cost War profits and profiteering. 


Wealth of world shot away Depression of 1920 Not a 
stock market panic Inflated inventories Dislocation of In- 
dustry Buyers' strike Falling commodity prices Era of 
Great Illusion History repeats itself. 


Reaction overdue "Back to Normalcy" Era of rank pro- 
motions Florida land craze Bond investments, good, bad 
and indifferent Bank affiliates Bailing out the banks 
Banks become security factories Reaping the whirlwind. 



New race of speculators Stocks begin to move up Three- 
million-share days Expanding business New symbols on 
ticker Big industrialists take hand Three stages in Bull 
Market Old standards discarded Yardsticks of value 
The new technique Credit inflation takes form Lure of 
the market Investor vs. speculator ''Easy come, easy go" 
Basis of so-called prosperity. 


Insull, future Power-King, comes to Chicago His start as 
Edison's secretary Capacity for hard work Finds Chicago 
rich field Commonwealth-Edison first step in rise First to 
adopt turbine generator Forms Public Service of Northern 
Illinois Middle West Utilities Money, credit franchises 
his for asking The first test Alfred Loewenstein, Belgian, 
fails to wrest control Insull faces another challenge Battle 
of giants Forms investment trusts Resources strained by 
effort to protect stocks Accepts ruinous settlement Forced 
to unload on public Net tightens Receivership Flight. 


President Harding's legacy The Navy oil lands Elk Hills 
and Teapot Dome Running down a $100,000 loan A 
complicated transaction in "Black Gold" Sinclair and his 
friends prepare to take an eight-million-dollar rake-off Fall 
again sits in the game Sudden exodus of oil men Rocke- 
fellers get a touch of conscience Six or eight "cows" 
Will Hays does some explaining Who is "Andy"? 


Inflationary movement develops Federal Reserve key to 
credit expansion Wall Street loses fight for control of bank- 
ing system W. P. G Harding, first governor, held aloof 
from Wall Street Reappointment not confirmed President 
appoints "one of the boys" New management falls under 
influence of Wall Street The Great conspiracy Half 
world's gold supply in our hands We decide to finance 
world recovery Credit structure rapidly expanded Wall 
Street and Washington join hands Unbridled inflation 


fidence game Fatal error The biggest forgery of all time 
Morgan closes the net The end. 


The morning after False prophets Talking our way back 
to prosperity Secondary reaction Wall Street and Wash- 
ington refuse to admit facts Mr. Hoover prophesies In- 
creasing unemployment Question of relief No dole 
President looks to Red Cross Wage question Short inter- 
ests in market Do-nothing policy Collapse of Central 
Powers Hoover Moratorium The depression arrives. 


Period of black despair Worldwide rush for gold England 
abandons Gold Standard Hoover awakes at last First con- 
structive measures RFC Hoover's supreme effort Gold 
drain continues Hoarding reaches peak Hoover and Con- 
gress at loggerheads Wall Street investigation Hoover 
and Bonus Army Politics The election A new pilot 
One city and the depression. 


Era of inaction ends Roosevelt faces banking collapse 
prompt measures Constructive steps Relief and reform 
come first Gold standard suspended Thomas amendment 
Three-point program NRA modifies industrial structure 
The first year Business on upgrade but fundamental eco- 
nomic problem still unsolved. 


The changing order End of era or breakdown of system? 
Present tendencies New Deal a square deal Economic 
undertone swelling Consequences of mass production 
Hours of labor and purchasing power Icke's conception 
of American destiny Reconstruction vs. Recovery The 
coming "boom" Building from the bottom up The profit 
motive and the New Order. 


FOR the general outline of this book the author is 
indebted to Mark Sullivan's masterly work, "Our 
Times", which has also suggested some of the subject 
matter of the early chapters. He has also consulted 
freely the following works, to which he desires to 
acknowledge his indebtedness: 

The Rise of American Civilization, by Charles A. 

and Mary R. Beard 

America Comes of Age, by Andre Siegfried 
Life of John D. Rockefeller, by Ida M. Tarbell 
Hanna, by Thomas Beer 

Morgan, the Magnificent, by John D. Winkler 
Forty Years of Finance, by Alexander D. Noyes 
The Banking Crisis, by Marcus Nadler and Jules I. 


American Industry in the World War, by Grosvenor 

D. Clarkson 

Iron, Blood and Profits, by George Seldes 
New Levels in the Stock Market, by Charles A. Dice 
Only Yesterday, by Frederick Lewis Allen 
Scapegoats, by Julian Sherrod 
Mirrors of Wall Street, Anonymous 
Weeds of Wall Street, by A. M. Wickwire 
Power Fight, by H. S. Raushenbush 
Confessions of the Power Trust, by C. D. Thompson 



Prosperity; Fact or Myth, and A New Deal, by 
Stuart Chase 

Life and Death of Ivar Kreuger, by W. H. Stone- 

Years of the Locust, by Gilbert Seldes 

The Coming American Revolution, by George Soule 

In addition to the foregoing, the author has drawn 
heavily upon the records of the Senate Banking and 
Currency Committee, whose investigation of Wall 
Street practises, ably conducted by Ferdinand Pecora, 
brought out many of the facts referred to in these 


SINCE the turn of the century it has been an open ques- 
tion in America whether Business would devour Govern- 
ment or Government would devour Business. During 
the first half of this period the trend was toward the 
emergence of Business as the dominant factor. During 
the latter half the trend has been in the opposite direc- 
tion. The dividing line was, of course, the war, when for 
the first time the government assumed complete control 
of industry. 

Relinquishing this control after the war, under the 
benign influence of the Reign of Normalcy, the govern- 
ment afforded business an opportunity to re-establish 
itself. It failed. Caught in the maze of a vast inflation of 
credit, instigated by Wall Street and carried out with 
the aid of Washington business succumbed to the 
mania of speculation and emerged disrupted and dis- 
credited. It is to be doubted that it will ever be trusted 
to take the helm again. 

As we look back over the years that have come and 
gone since the beginning of the century, the year 1917 
assumes an epochal significance. In a real sense it marked 
the end of the old order. With our entrance into the 
World War the New Freedom of Woodrow Wilson 
became an actuality. 



Before this the government had been largely in the 
hands of Big Business. Convinced of its righteousness, 
honestly enough, it set out to mold the social and eco- 
nomic order in its own image and, to a large extent, it 
succeeded. Despite the growing rumblings of discon- 
tent, despite the opposition of such a formidable force 
as the first Roosevelt, it succeeded on the whole in mak- 
ing the rich richer, whether or not it made the poor 

For a decade and a half, under the tutelage first of 
Mark Hanna and later with the aid of Speaker Joe 
Cannon and Senator Aldrich twin guardians of the 
old order Big Business made unprecedented gains. It 
consolidated its position. It imposed its philosophy of 
Rugged Individualism on a complacent world, and in 
its name it extended the scope of Monopoly and broad- 
ened the realm of Privilege. Through an unconscionable 
tariff system it added immeasurably to manufacturing 
profits and placed a back-breaking burden on consumers. 
Through legal trickery or outright seizure it took over 
the public domain and acquired timber, mineral and 
water power rights which were a part of the nation's 
heritage. Through bribery or political influence it ac- 
quired municipal railway and gas or electric power fran- 
chises, as in a previous era it had obtained railroad rights 
and had built great systems on borrowed money at costs 
which were inflated to cover vast construction profits 
for the promoters and then casually wrecked these sys- 
tems and bought them back at a fraction of their orig- 
inal cost. Through secret shipping or price agreements 
it crushed competition and destroyed its rivals. In the 
race for wealth it adulterated foods, falsified advertis- 
ing and oppressed labor and in every field it opposed to 
the last ditch any reform that threatened to cut into 


profits or lessen the power of Privilege. When occasion 
demanded or profit dictated it wrecked banks, looted in- 
surance companies and fostered panic all in the name 
of Rugged Individualism. Then, as a final gesture it 
dumped its ill-gotten gains and tainted properties into 
the hopper of Wall Street and emerged with vast hold- 
ings of watered stock, which it manipulated to its own 
profit and to the undoing of small investors and ignorant 

"In the end", as a keen British observer, Bertrand 
Russell, recently wrote,* "America became, in its eco- 
nomic life, an organized whole ruled, for their own 
profit, by a handful of rich men". 

In other words, a system of Organized Plunder. 

But the dictators of the old order reckoned without 
the war and the war wrecked their machine. Comman- 
deering their plants and means of transportation, 
largely through the instrumentality of their own paid 
executives, the government took over industry and 
turned it to the uses of war. Not only that, but it did a 
remarkably fine job, shattering for once the illusion that 
Government was incapable of functioning efficiently in 
the field of private business. When the war ended the 
government handed back to private capital a well-oiled 
machine, which, however, was geared up to a production 
capacity that in time spelled the ruin of industry. For 
when the short-lived post-war spurt of prosperity had 
spent itself Big Business was faced with the alternatives 
of drastic liquidation or inflation on a grand scale. Un- 
wisely it chose inflation and for seven mad years kept 
the ball spinning at an ever-increasing speed in a hope- 
less effort to save itself. Buoyed up by rampant specula- 

* Organization vs. Freedom 


tion and cheered on by the vociferous disciples of the 
New Economic Era philosophy, it appeared for a time 
that it might succeed ; in fact, it was almost convinced 
of the efficacy of its own nostrums, but in the end came 
collapse and business, big and little, found itself pros- 

That business has fallen from its high estate is due 
not so much to ruthlessness of purpose as to an inherent 
weakness in its philosophy. Like the Profits System, 
which is its economic counterpart, individualism is 
wholly a philosophy of self-seeking. Ignoring the fact 
that self-seeking leads to greed and greed to injustice 
and injustice to retribution, we have sought to rear an 
economic order which contains within itself the seeds of 
destruction. For it is impossible to build a world that 
is fit to live in or a civilization that will endure on the 
basest human vices or passions. 

But, say the defenders of the old order, it worked. 
All about us are the evidences of material wealth and 
progress. Look at the skyscrapers, subways, magnificent 
parks and homes. See the automobiles and radios in the 
hands of working folk. Has any other system ever done 
so much for the common man ? 

For the sake of argument, let us grant that it worked 
up to a certain point. But in the interest of truth let it 
also be recorded that when the first real test came it 
failed miserably. This is perhaps the greatest lesson of 
the Depression. 

As a matter of plain fact, if one cared to argue the 
point, it is a question whether the system ever really 
worked. It all depends on whether one looks at the 
scene from the standpoint of 1929, with a national in- 
come of 85 billion dollars, or from the standpoint of 
1933, when the national income had dropped some 40 


billion dollars with a corresponding decrease in living 
standards. It depends on whether one stands in the place 
of the farmer, who had faced declining prices and in- 
creasing costs for a decade or more, and the wage 
earner, whose gross earnings had continuously fallen 
during the same period, or whether one stands in the 
place of the investor or speculator, whose dividends and 
profits had mounted steadily. It was the curse of the so- 
called prosperity of the Twenties that it was distrib- 
uted with glaring unevenness. In some fields it was a 
glittering reality; in others it was palpably lacking. 

The essence of the theory behind the Profits System 
is the accumulation of profits at the top. It is true that, 
within limitations, its beneficiaries are willing to share 
their gains. In the interest of larger profits they will 
allow some small part of their wealth to "trickle down" 
to those at the bottom in the form of a living wage. 
But this is Feudalism with this exception: that in a 
feudal state the Great Lord assumes responsibility for 
the lives and property of his retainers, whereas under 
the existing system they are ever at the mercy of the 
capricious winds of prosperity. Obviously to attempt to 
establish an Industrial Feudalism within the scope of a 
Political Democracy is a contradiction in terms. One 
must yield to the other. Either we will have to get rid of 
democracy and accept autocracy which is another 
word for Fascism or we will have to get rid of eco- 
nomic feudalism and accept the principle of govern- 
ment control of industry otherwise known as regimen- 
tation. The sole remaining alternative is collectivism, 
which thinking people are not prepared to accept, in 
America at least. 

But we are getting into deep water. Let us return to 
the government. Under the NRA it is evident that 


at last Government has swallowed Business and in 
order to wash down its meal it has taken some potent 
draughts on the side in the form of other activities of 
the New Deal. Whether this is for good or ill, it is too 
early to say, but, as a choice between evils, there is a 
growing body of opinion which holds that it is the 
sounder course. 

From the practical standpoint, can the new system be 
made to work? Will it stand the pragmatic test? Why 
not? its supporters ask. All that they are attempting to 
do is to set up a planned economy in place of a "hit-or- 
miss" economy. We are not attempting, they argue, to 
subvert existing institutions. We do not propose to do 
away with the right of private property. It is possible, 
they admit, that they will exalt human rights, but that 
is not to say that they will destroy property rights, ex- 
cept perhaps insofar as they are anti-social. Nor do they 
seek to change the processes of government. They accept 
the Constitution and propose to live under it. Is this 
subversive? Is it unsound or unpractical? 

But, notwithstanding this, it is not to be denied that 
the philosophy of the New Deal runs directly counter 
to that of the old order. In fact, there are signs that the 
new leadership is preparing to discard the Profit mo- 
tive as a determining factor in its economics. Fortu- 
nately, it holds, there are other motives that will serve 
the same purpose more effectively and more humanely. 
There is, for example, the Security motive. If we can 
once convince ourselves that the security of all means 
the security of each and every one it is possible that we 
will find a common ground on which government and 
industry can meet. 

Certain it is that the desire for security, or the instinct 
of self-preservation, is the deepest human instinct. To 


deny this or to say, as the old order does, that the preda- 
tory instinct which is the biological equivalent of the 
Profit motive is the primary impulse of natural man is 
founded neither on fact nor on human experience. In 
his natural state man was not a hunter he was the 
hunted. The Hunting Stage of mankind was a super- 
imposed culture which was destined to go the way of 
other cultures, and to attempt to build an economic 
system on this discarded remnant of a dead past is an 
anacronism. Worse than that, it is a reversion to the 
"reign of tooth and claw". 


ON JANUARY 1, 1900, as the new century rounded 
the turn,* William McKinley was president of these 
United States. Following a long and bitter political 
struggle, the "Silver scare" had proved to be merely a 
nightmare of the Nineties and sound money was safely 
in the saddle. Bryan had been "knocked into a cocked 
hat", as Wilson put it later, and Capital sat down to 
survey its hard-won gains. Be it said also that, after 
wandering about homeless for seven long years, the 
trusts had found a sanctuary at last in the State of .New 

* Following the lead of Mark Sullivan in his comprehensive 
work, "Our Times", we have accepted this date as the starting 
point of our narrative in order to provide an adequate back- 
ground for the events that followed, well knowing that the new 
century did not actually begin until a year later. The year 1900 
was the last year of the nineteenth century, but it was marked 
by stirring events whose consequences were to be reflected in the 
succeeding era, including the adoption of the Gold Standard, 
which put an end to "Free Silver" as a political issue and the 
emergence of Theodore Roosevelt as a national figure. At this 
time Calvin Coolidge was making his start in politics in a small 
New England town, Herbert Hoover was a cub engineer in 
China and Woodrow Wilson was a professor at Princeton. 
Franklin D. Roosevelt was still a student at Groton. 



Jersey and all was well again in Wall Street. It was a 
time of promise for Big Business. 

Meanwhile, in other parts of the world, events of 
moment were taking form. England was still muddling 
her way through the troublesome and unpopular Boer 
War, from which it was not to emerge the victor for 
another two years and then only at the cost of many 
lives and 100,000,000 in treasure. In Windsor Castle 
Queen Victoria was entering upon the last year of her 
reign, her eyes already turned longingly toward those 
bright shores where the beloved Prince Consort stood 
beckoning, while the future Edward VII made ready 
to write the word "finis" to the long, resplendent Vic- 
torian Age. 

Taking advantage of Britain's absorption in the 
Boer War, on this same January 1 on which our nar- 
rative opens, the boisterous young Kaiser delivered 
himself of his first manifesto calling for a greater Ger- 
man navy. 

"Even as my grandfather labored for the army," 
said he in his high-pitched, strident voice, "so will I, 
in like manner, carry on and carry through the work 
of reorganizing my navy, in order that it may be jus- 
tified in standing by the side of my land forces and that 
by it the German Empire may also be in a position to 
win the place to which it has not yet attained. With the 
two united I hope to be enabled, with a firm trust in 
the guidance of God, to prove the truth of the saying 
of William the First: When one in this world wants 
to decide something with the pen, he does not do it 
unless supported by the strength of the sword'." 

Fateful words, these seem, in the light of later 

On this side of the Atlantic, these thirty-odd years 


ago, the country was about to emerge from a depres- 
sion which, in point of severity, has been exceeded only 
in our own times. Since the early Nineties the country 
had been in the grip of "hard times", punctuated by 
labor troubles, agricultural distress, bank failures and 
political uprisings. At Chicago, during 1894, the Pull- 
man car strike had brought out both the militia and 
Federal troops and the injunction had been called into 
use for the first time as a weapon with which to fight 
the unions. Two years before, in 1892, occurred a 
bloody riot at the plant of the Carnegie Steel Company 
at Homestead, Pa., where seven persons lost their 
lives and twenty more were injured. At one time or 
another more than 750,000 workers were on strike. 
During these five years 1268 banks closed their doors; 
there were 70,963 business failures, the price of farm 
products dropped 33%, the general business index 
26%. Many looked for revolution. But revolution did 
not come. Somehow, some way, without the aid of 
particularly enlightened leadership, the latent powers 
of the then nation of 105,000,000 people asserted 
themselves and at the time when this chronicle begins 
recovery was well under way. 

In those vanished days we knew little of charts or 
curves. Steel production and car loadings had not even 
come to be accepted as business barometers. But, as 
the old century came to an end, it became evident that 
opportunities for employment were increasing. The 
"Help Wanted" ads occupied larger space in the papers. 
There was work in the industrial centres and the "full 
dinner-pail" came to mean something more than a cam- 
paign shibboleth. On the farm, too, there was hope. 
Following the long, lean years of the Nineties, during 
which he had turned a half-willing ear to strange polit- 


ical and economic gods, it looked as though the farmer 
was coming into his own again. Wheat was selling at 
70c a bushel. Corn at 33c. Hogs brought $4.15 a hun- 
dred and cattle $4.25 on the hoof. Factories and rail- 
roads were getting busy. Stocks were going up. 

Reflecting these conditions, Broadway was making 
ready to earn its sobriquet as the "Gay White Way." 
Corticelli set up its huge electric sign at the lower end 
of Times Square and overnight the whole area was 
winking and blinking. It was not long before the "Ten- 
derloin" began to liven up. The gay young blades from 
Old Eli and Nassau made merry at Jack's and Browne's 
Chop House, occasionally straying over to Mollie's or 
the Haymarket in the late hours. "Florodora" held 
forth to increasing audiences at the Casino and at the 
Metropolitan the "Diamond Horseshoe" glowed with 
added brilliance, while Mrs. Astor ruled the Four Hun- 
dred with an iron hand, albeit encased in a silken glove. 

So it was in the teeming regions above Fulton Street. 
Below large plans were afoot. In the sanctum of J. P. 
Morgan and Company, at Broad and Wall Streets, the 
U. S. Steel Corporation was already beginning to take 
form in the constructive mind of old "J. P." Down at 
26 Broadway, but a step away, John D. was reaching 
out his tentacles a bit further; his minions were angling 
for the control of banks, as a decade earlier the elder 
Morgan had pointed the way, and the little giant, E. 
H. Harriman, was feverishly working out his dreams 
of railroad empire. It was a time of ferment. Great 
plans were in the making. Great forces were taking 

Up to this time there had been little that distin- 
guished America from other new societies, aside from 
the rapidity of its development. It had both the faults 


and virtues of a youthful civilization. Following the 
discoverer and settler, the pioneer and prospector had 
blazed a path across the continent which had been taken 
by countless numbers of the old stock back in New 
England. In a spirit of high adventure they had set out 
upon the westward trail, pausing sometimes midway 
to have a u go at it" in Kentucky or Ohio, and then 
pushing on again, often not to end their journey until 
they looked out upon the broad waters of the Pacific. 
It is a curious fact that the mighty task of opening up 
the West fell largely to the same Puritan stock which 
had settled New England barely two centuries before. 
From the farms and hamlets of Connecticut, Vermont, 
New Hampshire, Maine and Massachusetts poured out 
an endless stream of men and women who were to be- 
come the backbone of the New West. With them and 
their covered wagons they brought their sturdy spirits 
and uncompromising notions of right and wrong, a bit 
of their religious intolerance and, in full measure, their 
unconquerable will to wrest a home and living from this 
fair land which their forefathers had found. From 
other sections of the country drifted in elements of a 
different sort who, too, fell under the spell of the West 
the free and easy southerner, who came out booted 
and spurred to punch cattle, the trader from the grain 
centres of the Middle West, an occasional Jewish mer- 
chant, the gambler from the river boats and the lawless 
from everywhere. All in all, it was a motley crowd that 
peopled the West in the days after the war and they 
produced a new type of American, perhaps the first 
American type, the breezy Westerner who did things 
on a grand scale, whether it was to build a transcon- 
tinental railroad or "bet cha a million", as John W. 
Gates was wont to do. 


If the New Englander who went out to the West in 
the Sixties or Seventies took a notion to come back to 
the land of his birth for a visit in the Nineties, after he 
had made his "pile," as he often did, he was more than 
likely to find that his place had been taken by aliens. 
Under the influx of a great tide of immigration, which 
set in as early as the Forties and reached its flood 
toward the end of the century, Irish and Scotch first, 
then Germans, Scandinavians and French-Canadians, 
followed by Italians, Slavs and Jews, had arrived in 
droves. Settling down in the industrial centres of the 
East or taking up the waste lands of the Middle West, 
these strange people wrought many changes in the out- 
ward aspects of our civilization. From 1880 to 1914, 
22,000,000 of these people came in. Before 1880, nine 
and a half million. Almost 32,000,000 all told. By 
1900, out of a total population of 105,000,000 less 
than 60,000,000 had been born in the United States 
of native parents. Out of 95,000,000 whites 36^ mil- 
lion were of foreign origin. Of these 13^2 million had 
been born abroad and both parents of the remainder 
had been born in other lands. 

In all truth, America had become a melting pot, but 
out of this welter of strange and discordant forces 
gradually emerged a philosophy, which was to exercise 
a deciding influence on the destiny of the next genera- 
tion. To a great extent this was a product of the Amer- 
ica that came into existence before the tide of immigra- 
tion set in. Essentially it was a native product, the 
result of forces which had been set in motion during, 
or immediately preceding, the Civil War, but it was 
tempered somewhat by the hopes and aspirations of 
the earlier immigrants, chiefly British and German. 
Broadly speaking, this philosophy was one of individual 


opportunity opportunity free and untrammelled, 
based upon the assumed right of the individual to seek 
his fortune in his own way, without interference, super- 
vision or even question from his government. Predicated 
upon the inalienable right to life, liberty and the pursuit 
of happiness vouchsafed to all in the Declaration of 
Independence, it translated happiness largely into terms 
of wealth and the pursuit thereof into a mad chase in 
which the rewards were destined for the fleetest and the 
"devil took the hindmost". By degrees, then, we came 
to set up the concepts of shrewdness and power as 
equivalents for speed, and so the race was as often to 
the wily and ruthless as to the swift. And by these means 
men became rich and so, presumably, happy, while in 
more civilized communities the name "American" came 
to connote a shrewd and often unscrupulous fellow who 
had lots of money and spent it ostentatiously, without 
ever arriving at an understanding of the finer things of 
life. Success in dollars and cents was the keynote of 
this philosophy and freedom to achieve it, each in his 
own way, its kernel. Uncle Sam became an animated 

That this was a natural, almost inevitable outgrowth 
of our national life, goes without saying. We were a new 
people in a new world. Immigrants or the descendants 
of immigrants but one step removed, in most cases, we 
had cast off the yoke of an older civilization, which too 
often stood for slavery. Retaining only a sentimental 
feeling for the old country, we repudiated its works and 
resolved to set up a new and better order. Not only this, 
but we set out to build it overnight, and naturally we 
built crudely. Along with our blatant ideas of display 
we cultivated a rude and boisterous sense of humor; we 
developed the travelling salesman and his endless string 


of banal stories; we produced the corner saloon, the 
gingerbread type of architecture, billboard advertising, 
comic supplements, hard-shell Baptists, rotary clubs and 
a host of other nuisances. It is surprising what a lot of 
absurdities come to the surface in the course of building 
a civilization. Like the measles, they seem to be the 
accompaniments of growth. 

However this may be, there is no doubt that America 
had its full share of infantile disorders and it was just 
about to throw them off at the turn of the century, 
which found the nation in safe hands, politically speak- 
ing, President McKinley having again been returned 
by the electorate. The opera-bouffe war with Spain had 
been fought and won ; imperialism was triumphant and 
expansion was in the air. For a brief spell these questions 
engaged the attention of the people, but matters of more 
immediate concern soon crowded them into the back- 
ground. It became increasingly evident that the country 
was in for a period of good times. 

During an almost unbroken stretch of twenty-five 
years prices had been steadily declining, along with 
wages and investment yields. Then suddenly the trend 
was reversed. Overnight almost commodity values took 
an upward turn and, as the dollar bought less, people 
spent more rapidly. Fearing a continuation of the move- 
ment, manufacturers laid in stores of raw material. 
They abandoned hand-to-mouth buying and bought 
ahead. This stimulated production in all lines and almost 
before the new century was underway the whole country 
was talking prosperity. True, this talk got a set-back in 
1901, when a struggle between two financial giants for 
railroad control brought about a panic in Wall Street 
which threatened for a moment to result in national 
disaster. But the forces of recovery were too strongly 


entrenched and the danger quickly gave way to onrush- 
ing prosperity. Within another twelve months good 
times were back in earnest and not even the assassina- 
tion of President McKinley and his replacement by 
Theodore Roosevelt, whose ideas were not exactly in 
accord with those of Big Business, was able to stem the 

So stood our world as the first year of the new century 
came to an end. 



THE FORCES that came into being during the closing 
years of the last century were not altogether the product 
of those years. They reach far back to the beginnings of 
the industrial era, which followed close on the heels of 
the founding of the Republic. During the years before 
the Civil War America was transformed from a nation 
of small shop-keepers and land-owners, leading a lei- 
surely, undisturbed existence, to a nation of factories, 
mines and hustling, bustling competition. To the rail- 
roads, more than anything else, this change was to be 

During the early years of the last century the typical 
American community lay upon a natural waterway or 
cross-roads and was grouped about a few small indus- 
tries a blacksmith shop (which was also a tool-making 
shop), a cobbler or saddlery, a wheelwright, a potter, 
a tinsmith, a miller to whom the farmer brought his 
grain to be ground into flour, a general store and pos- 
sibly an inn. The only means of transportation was the 
stage-coach or the canvas-covered freighter, the Canis- 
toga wagon, and the canal or river boat. The only forms 
of power were man power, horse or ox power, and water 
power. By these means the farmer tilled his land and 
drew his loads and industry produced and shipped its 



wares. Gradually this system was changed by the coming 
of steam, but it was not until steam was applied to trans- 
portation that a marked change in the character of 
life occurred. As steam-driven machinery came into use 
one-man shops became several-man shops, or factories, 
but their markets were still restricted by lack of trans- 
portation facilities. It was useless to make more goods 
than the market within reach could absorb, but the 
processes of manufacture were cheapened and it was not 
long before the hand-worker came to find himself at a 
disadvantage. By degrees, then, the one-man shop was 
driven to the wall. The cobbler and saddlery gave way 
to shoe and harness factories, the wheelwright to the 
wagon maker, the potter's wheel to the pottery, the 
itinerant tinsmith to the tin-shop or iron works. The 
blacksmith held his own as long as the horse was a com- 
mon means of transportation and the miller was not 
supplanted until he was overwhelmed by the big mills 
which reached out and bought grain in the field, milled it 
and shipped it back to be sold at prices that were less 
than the small miller could grind it for right on the 

With the coming of the railroads markets were ex- 
panded almost to illimitable extents and industrial or- 
ganizations grew in size and scope with the expansion 
of markets. Soon all industries were in the same case as 
the local miller. Expanding operations cut down the cost 
of production to a point where the one-man shop, or 
small local factory, was unable to compete. Month by 
month he lost business to the "drummer" from the big 
cities and finally gave up in despair. As the railroads 
extended their lines out into new areas the small shop 
was driven out of business and wealth accumulated in 
the industrial centers. 


In the years following the Civil War this process was 
Vastly quickened. The country entered upon an era of 
railroad building which had had no parallel in any coun- 
try theretofore. During the Seventies and Eighties, 
notwithstanding two severe industrial depressions, some 
75,000 miles of new track were laid. Promoters and 
railroad builders made vast fortunes out of the con- 
struction of these new lines and their profits were 
poured back into industrial channels. Soon gigantic 
steel and coal industries had come into being and Eu- 
rope began to pour in immigrants by the millions to 
provide the man power that our growing industrial 
system required. Despite occasional set-backs, wealth 
increased rapidly during this period and the industrial 
fabric continued to expand under this stimulus. 

In the meantime the small rural community had con- 
tinued to decline in importance. Often left "off the line" 
by the railroad in seeking the shortest route between 
two points and continually harassed by the growing 
competition of its larger neighbors, it lost hope. Its 
younger blood drifted to the big cities, where it was 
swallowed up in the growing stream of industry. Others 
moved on to the freer and more open spaces of the great 
West, leaving only the old "moss-backs" to continue the 
unequal struggle with the forces arrayed against them. 
Naturally there was a good deal of heart-burning, a 
good deal of dissatisfaction with the changing order, 
and not a little spleen exhibited against the system that 
had made over life to the disadvantage of the old resi- 
dents, but their spirits were broken and nothing came 
of it. 

By the Eighties American life had assumed a form 
which would have been wholly unrecognizable to the 
visitor of the Forties. Along the Atlantic seaboard and 


in the Great Lakes district large cities had sprung into 
being, in several cases counting their population in the 
hundreds of thousands. These cities were veritable bee- 
hives, teeming with industry and sending out their prod- 
ucts to all parts of the world. Centers of wealth they 
were, dotted with magnificent residences and public 
buildings and plentifully supplied with high-steepled 
churches, for in America wealth ever walked hand-in- 
hand with religion. We are a god-fearing people and 
live according to the precepts of the Master so long 
as they do not affect our pocketbooks. By this time the 
central section of the country, or the Middle-West, 
which was a natural point of distribution, had, if any- 
thing, outstripped the more substantial, if less aggres- 
sive, centers of the East. Long before this Boston had 
lost the palm to New York and Philadelphia, but now 
Chicago and Cleveland set up a rivalry that threatened 
the leadership of the Eastern seaboard. Imbued to the 
last degree with the money-making instinct, these cities 
of the Middle West established new standards of prog- 
ress and aspired to goals that had never been dreamed 
of before. "Bigness" was their god, bigness in area, in 
population, in achievement and in the scope of their 

In the smaller of these two cities, Cleveland, which 
had become a centre of the coal and iron industries and 
was looking eagerly toward the oil fields of Pennsyl- 
vania, was born and carried out an idea that had a 
momentous effect on the business and economic future 
of the country. Almost a score of years before the pe- 
riod of which we write in 1 8 5 5, to be exact, a farmer 
boy, whose family had sensed the drift of the times and 
had left their farm in New York State to take up their 
residence in Cleveland, went to work as a bookkeeper 


in a produce firm. His name was Rockefeller John D. 
Rockefeller. Being thrifty, he saved his money and soon 
became a partner in the business. The firm prospered 
and young Rockefeller invested his profits in the u oil 
refining business", which was then in its infancy. Watch- 
ing expenses closely and visualizing more clearly as time 
went on the growing possibilities of the oil business, 
again his firm made money. One by one, he acquired 
partners, names that were soon to become, like his own, 
by-words for great wealth Henry M. Flagler, Stephen 
V. Harkness and Samuel Andrews. Rockefeller, An- 
drews and Flagler the firm became known, soon to be 
merged into the Standard Oil Company. This occurred 
in 1870, at which time the Rockefeller firm was the lead- 
ing one in Cleveland oil circles and controlled more than 
one-fifth of the business. The Standard Oil Company 
was capitalized for $1,000,000, divided into 10,000 
shares having a par value of $100 each, of which John 
D. Rockefeller acquired 2667 shares, in addition to a 
partnership interest in 1,000 shares held by the original 
firm of Rockefeller, Andrews and Flagler. 

John D. was a shrewd manager and he knew the oil 
business. More than that, his far-seeing mind recognized 
the waste involved in the cut-throat practises which 
were common to all forms of business at that time. Ruth- 
less competition was the order of the day. "Idiotic, 
senseless destruction", Rockefeller called it and then 
set out to outdo his competitors in ruthlessness. It was 
a time when all economists held that "competition was 
the life of trade", and, much as he disliked the rule in 
the abstract, Rockefeller proved to be an adept In its 
practise. Looking toward the stabilization of the in- 
dustry, he developed an objective of monopolistic con- 
trol, under which all units were to be brought together 


into a single group under one leadership, the group and 
the leadership to be his own, of course. 

In order to bring this about Rockefeller and his asso- 
ciates adopted a device which later came into broader 
use. They decided to form a "Trust". In its early stages 
this Trust would scarcely be recognizable as the proto- 
type of such instruments which later came to dominate 
industry in this country. As a first step he formed a 
company, known as the South Improvement Company, 
of which he and his associates acquired control. The 
chief function of the South Improvement Company was 
to enter into certain contracts with railroads by virtue 
of which the Rockefeller company obtained distinct ad- 
vantages over their competitors in consideration for 
shipping over the lines in question. Chief among these 
advantages were, first, certain rebates, ranging from 
25% to 50%, which reduced their shipping cost accord- 
ingly. In other words, having charged the regular freight 
rate, the railroad agreed secretly to rebate a portion of 
the freight charge. But that was not all. In addition to 
this, the railroad agreed to allow the South Improve- 
ment Company a similar drawback on all oil transported 
from other firms. Thus, the railroad agreed to pay to 
the Rockefeller company from 25% to 50% on all the 
freight charges paid by competitors. Between these two 
advantages, rebates and drawbacks, no outsider could 
afford to compete with Rockefeller, since these com- 
bined savings and profits enabled him to cut prices to a 
point that could not be met by competitors. 

How Rockefeller obtained these advantages has 
never been definitely disclosed, whether by bribery or 
threats or through mere "pull", but the business ethics 
of the times permitted all three. However that may be, 
armed with these agreements Rockefeller and his asso- 


elates approached their leading competitors and offered 
them the alternatives of coming into Standard Oil or 
being driven out of business. If they came in they got a 
fair price for their properties, preferably in Standard 
Oil stock. If they refused they were ruthlessly driven to 
the wall. Out of twenty-six competitors whom they 
offered to take in twenty-one accepted. The price offered 
in cash, in all instances, was considerably less than the 
actual value of the property, but Rockefeller justified 
this by the state of the oil business, which was depressed 
at the moment. Besides, as it later transpired, if the seller 
took stock, as Rockefeller urged, ultimately he got back 
many times the worth of his property. 

Having carried out successfully this initial step in 
establishing a monopoly and taken the chief units in the 
Ohio field under his wing, Rockefeller now set out to 
rivet his control upon the entire industry. The centre of 
the oil industry was really in Pennsylvania, where the 
oil fields were located, and its heart was Oil City. Here 
the oil industry had been born and nurtured into a lusty 
business by a small group of hardy individuals who 
looked upon themselves as the founders of the industry, 
as indeed they were. Rockefeller now turned his guns in 
their direction, again working through secret channels. 
The chief advantage which Oil City had over Cleveland 
was a shipping advantage, arising out of its location at 
the source of supply. With a single stroke Rockefeller 
destroyed this advantage. Through his railroad connec- 
tions he obtained an increase in freight rates from Oil 
City which more than offset the Cleveland differential. 
Henceforward he was able to ship oil from Cleveland 
to almost any point at a lower rate than it could be 
shipped from Oil City. 

Naturally the Oil City people were indignant, but 


they were not satisfied merely to fume. They decided to 
do something. Within a few days they traced the instiga- 
tion of the freight rate increase to its source. Further- 
more, they secured a copy of the charter of the South 
Improvement Company and published it. Going a step 
further, they placed an embargo on the sale of oil to the 
Rockefeller company and followed this up with bitter 
protests to the railroads and threats of legislation. 
Frightened at the furor, the railroads capitulated. They 
cancelled their contracts with the South Improvement 
Company and for the first time placed the transporta- 
tion of oil, in the words of their announcement, "upon 
a basis of perfect equality for all". But the damage had 
been done. Rockefeller had achieved his immediate ob- 
jective. He had swallowed up the main refining and 
distributing units in the oil industry and strangled the 

Curiously, the lawyer who played the leading part in 
the discomfiture of the Rockefeller interests at this 
time, Samuel C. T. Dodds, later became their chief 
counsel and figured prominently in the more recent af- 
fairs of the Standard Oil Company. 

Unwilling to accept his defeat as final, Rockefeller 
set out relentlessly to achieve his original purpose. Dis- 
carding the South Improvement Company as a useless 
instrument, he formed an association of the Standard 
Oil companies, under the name of the Central Associa- 
tion of Refiners, and through this medium again put into 
effect his original rebate agreements. Out of this associa- 
tion, generally known as the "Alliance", evolved the 
"Trust" in its latterday form. Recognizing the associa- 
tion as a more or less inadequate instrument with which 
to oppose the increasing attacks on his organization and 
his policy of monopolistic control, Rockefeller with 


the assistance of Attorney Dodds worked out an ar- 
rangement under which the stockholders of the various 
Standard Oil companies deposited their stock, with 
irrevocable powers of attorney attached, with a group 
of trustees, under a trust agreement that gave to the 
trustees full control and management of the properties 
and provided for the distribution of profits pro rata to 
the stockholders. By virtue of this device Rockefeller 
and his associates maintained themselves in full control 
of all properties in the Standard Oil group and in the 
face of anti-monopoly legislation strengthened their 
position to a point where they had secured control of 
ninety per cent of the oil business by the late Eighties. 
Following various court decisions handed down in the 
Nineties against the legality of the "Trust" as a device 
to secure monopoly, the form was changed to a holding 
company, but it was not until 1911 that Rockefeller's 
hold on the oil business was broken, when the United 
States Supreme Court ordered the dissolution of the 
Standard Oil Company of New Jersey as a "combina- 
tion in restraint of trade". Thereupon the company was 
dissolved and the stock of the thirty-three constituent 
companies distributed pro rata among its shareholders. 
The system of railroad discrimination which was 
responsible for the upbuilding of Standard Oil quickly 
came into more general use. Secret rebates became a 
universal practise among the railroads and were applied 
both for the purpose of increasing traffic on individual 
lines and as a means of building up industries in which 
the management was interested, at the expense of com- 
petitive concerns. In fact, as time passed, it became in- 
creasingly evident that the chief incentive for large-scale 
railroad investment lay in the control that it afforded 
over other industries and this, in turn, led to a general 


lowering of moral standards among the personnel of 
the roads. Following the lead of the management, graft 
became common among the minor officials and few con- 
tracts of any amount were let without huge "rake-offs" 
to purchasing agents or other officials. By this means it 
later transpired, through an investigation of the Eastern 
roads, an official of the Pennsylvania Railroad who drew 
a salary of only $225 per month was able to lay aside 
$60,000 or more through gifts from "friendly" coal 
companies, and a $100-a-month chief clerk was able to 
invest $75,000 in stocks. An even more flagrant instance 
was that of Andrew Carnegie who, it has been charged 
without denial, got his start in this way. As a minor 
official of the Pennsylvania he laid the foundation of his 
fortune through such favors from shippers and in return 
for favorable traffic arrangements secured an interest 
in various building projects which ultimately put him in 
the iron and steel business. 

But the railroads had other sins to answer for. The 
greed of their promoters knew no bounds and their 
stocks were shot up and down on the exchanges like foot- 
balls. Struggles for control were of everyday occurrence 
and control invariably meant nothing more than an op- 
portunity to scalp a profit through stock manipulation. 
For the benefit of operators on the short side, railroads 
were wrecked as casually as if they were just so much 
chinaware and reorganizations became the order of the 
day. Reflecting this condition, one-quarter of the total 
railroad mileage of the country was placed in receiver- 
ship during the depression of the Nineties. Perhaps the 
old Erie was the chief offender in this respect. During 
the Eighties Jay Gould and Daniel Drew put on a classic 
battle for control of this property and the printing 
presses were worked overtime in order to add to the 


stockholdings of one interest or the other. Commodore 
Vanderbilt was also drawn into the conflict with Drew, 
who was probably the most conscienceless operator that 
Wall Street ever knew. The stories of these battles have 
been told over and over again and they ended in the 
bankruptcy of "Old Dan'l". As an incident of the 
struggle, the Erie went through a series of reorganiza- 
tions as a result of which it finally emerged with a funded 
debt in excess of $200,000,000, constituting a burden 
upon operations that kept the road on the verge of re- 
ceivership for another generation. 

Committed to the policy of charging "all that the 
traffic would bear", with such incidental discrimination 
in rates as suited their immediate purposes, the railroads 
put themselves in a position of complete domination 
over industry. Practically without hindrance they built 
or destroyed as they saw fit, and up to the Nineties little 
or no effort was made to control their activities. Not- 
withstanding the fact that they were common carriers 
and had been endowed by the courts with the "right of 
eminent domain", they continued to look upon them- 
selves as private properties, but early during the Nine- 
ties, or shortly prior thereto, a different attitude began 
to develop on the part of a section of the public. That 
the railroads derived their power from the state and so 
were properly subject to government supervision was 
an idea that began to take hold. Starting in the Middle 
West, it spread throughout the country and soon af- 
fected many States. In order to buttress their position 
the railroads got into politics. Always more or less 
closely allied with the political element, they now set out 
to establish control of State legislatures and in many 
cases they succeeded. They were not over-scrupulous 
about their methods. Railroad passes were a common 


form of exercising influence. In those days few politi- 
cians, legislators or their friends ever paid a railroad 
fare and even in the halls of Congress the railroads 
openly maintained their representatives, who parcelled 
out passes as the exigencies of the moment required. 
Likewise local attorneys who had political influence 
found the railroads willing and profitable clients. But in 
the face of this opposition, both open and underground, 
public sentiment grew and solidified. Starting in Illinois, 
legislation was enacted in many States for the purpose 
of controlling freight rates and railroad practises in 
general, but much of this was set at naught by court de- 
cisions, which were uniformly favorable to the railroads. 
Finally the whole matter was thrown into Congress by 
a decision of the Supreme Court handed down August 
1 , 1886, substantially denying the right of the individual 
States to regulate interstate commerce. 

Following this, as a concession to public opinion, 
Congress passed the Cullom Bill, a comparatively weak 
and ineffective measure, which, however, created a new 
instrumentality for dealing with the railroads namely, 
the Interstate Commerce Commission. For a decade 
or more the railroads fought this bill in the courts, on 
the whole successfully, and in 1J397 obtained a decision 
from the Supreme Court to the effect that the Commis- 
sion had no mandatory power to fix rates. 

There the issue hung until 1905, when the Hepburn 
Rate Bill was passed under the spur of Theodore Roose- 
velt and provided for an effective regulation of railroad 
rates but in the meantime Roosevelt had ended the 
inequity of rebating by a separate act and had laid the 
foundation for a general overhauling of corporate prac- 
tises. The octopus was driven into a corner. 



WHEN the business interests of the country emerged 
from the election of 1896 with the scalps of the "Free 
Silverites" hanging at their belts, there is little doubt 
that they accepted the election as a national vote of 
confidence. "Green lights ahead' 5 was the signal, as they 
understood it, and they lost no time in following up their 
advantage. Taking their cue from John D. Rockefeller, 
they started a veritable orgy of trust-building, which 
carried through the Nineties and well into the first 
decade of the new century. Between 1898 and 1900, 150 
industrial combinations were put together with a total 
capitalization of $3,000,000,000. By 1904 the capitali- 
zation of such combinations had grown to $7,000,000,- 
000 and ten years later it had attained a total in excess 
of $10,000,000,000. In 1891 the Sugar Trust was 
formed, with a capitalization of $224,000,000; the Ag- 
ricultural Implement Trust in 1902, with a capitaliza- 
tion of $ 120,000,000 ; the Tobacco Trust in 1 904, with 
a capitalization of $150,000,000. The Beef Trust, a 
rather loose aggregation of five big companies and about 
twenty-five subsidiaries, operating under a pool agree- 
ment which was clearly in violation of the anti-trust laws, 
got started as early as 1885 and carried on until 1902, 
when it was forced to suspend operations. And in 1901 



J. P. Morgan and Company announced the biggest trust 
of all, the United States Steel Corporation, with a cap- 
italization of more than one billion dollars. 

That these great combinations became possible at all 
was largely due to the sheltering arm of Mark Hanna, 
twin guardian of the Republican Party and Big Busi- 
ness. Caricatured far and wide as the "Mother of 
Trusts", there is no doubt that his influence in Congress 
and with the Administration permitted these vast aggre- 
gations of capital to consolidate their positions. 

In the meantime a noticeable wave of protest was 
making itself felt throughout the country. Notwith- 
standing increasing evidences of returning prosperity, 
the small businessman and the farmer alike began to feel 
that they were in danger of being throttled by these 
enormous combinations which controlled both the 
sources and the outlets of many of the necessities of life. 
The small businessman feared that he could not with- 
stand their competition, as indeed he was seldom able 
to do when their paths crossed. The farmer felt that by 
virtue of their control of markets they were in a position 
to fix prices to his disadvantage, as they unquestionably 
did on occasions. At the same time the public feared their 
power to establish selling prices at levels that constituted 
a burden on its limited purchasing power. This impres- 
sion was heightened by the rising tide of commodity 
prices which began to assert itself at the turn of the cen- 
tury. As usually happens, wages did not rise as rapidly 
as prices and the wage-earner saw himself ground be- 
tween the upper and the nether millstone. Naturally he 
was vociferous about it and politicians and sensation 
mongers took up the cry. Soon there was a great to-do, 
supported by a flood of exposure literature, and in the 
midst of it the army of discontent found a sympathetic 


friend, if not an actual spokesman, in the person of 
Theodore Roosevelt, who was catapulted into the presi- 
dency on September 14, 1901, by the assassin's bullet 
that took the life of President McKinley. 

But we are running ahead of our story. Much water 
was to flow over the dam before "Terrible Teddy" 
started to wave the Big Stick in the general direction 
of Wall Street. 

Mark Hanna was a much misunderstood man. De- 
spite the unwavering support that he extended to those 
business interests which had favors to ask in Washing- 
ton, he was not a tool of the interests, as often has been 
charged. As a matter of fact, he was never in favor in 
Wall Street. The financial district appreciated, and 
somewhat resented, his ability to "fry the f at" out of the 
moneyed interests, but his rough ways and crude manners 
were always a little too much for the delicate sensibilities 
of the new generation that was coming up in the Street. 
What could a perfumed elegant like James H. Hyde 
have in common with the porcine Hanna, whose gargan- 
tuan belly shook like jelly when he made his coarse 
jokes? Hanna was a friend of business; there is no 
doubt of that. He was more than a friend. He had a 
deep-rooted, unassailable faith in the competitive sys- 
tem. Conscientiously he believed that the welfare of the 
country was linked up with the well-being and leadership 
of industry. For that reason he saw to it that the Repub- 
lican Party became the protector of business, but in his 
mind it was Little Business as well as Big Business. For 
the same reason at times he was willing to overlook the 
aberrations of Big Business, which he considered on the 
whole as tending to a larger good, however questionable 
they might be in individual instances. Hanna himself 
was not a trust promoter. It is doubtful that he ever 


had to do with a promotion of any kind in all his life. 
He was a builder. A millionaire already when he became 
a national figure, he was heavily interested in coal and 
iron, was a street railway magnate and banker, but there 
is no evidence that he ever used his political influence 
to further his own business interests. On the whole 
Hanna was fair-minded. As an employer he dealt rightly 
by labor. In his entire business dealings there is no 
record that he ever allowed a dispute with labor to go to 
an issue. Moreover, he was ever ready to condemn 
short-sighted capitalists who sought to take advantage 
of their employees. When George Pullman, for in- 
stance, allowed himself to be drawn into the great Pull- 
man Strike of 1894, he did not hesitate to berate him 
soundly. "Any man who will not meet his employees 
half way," he blurted out, "is a God-dam fool" a re- 
mark which Pullman never forgave. 

Bluff, hearty, good-natured, unshakable in his pur- 
poses and righteously convinced of the divine right of 
business to dictate the terms of life, nevertheless Mark 
Hanna was probably one of the most disruptive forces 
that ever appeared on the American scene. By virtue of 
these same faults or virtues, as one may regard them, he 
offered an unmistakable target for the enemies of Big 
Business and, in the name of prosperity and the Repub- 
lican Party, was often easily, if not venally, induced 
to further the ends of predatory or conscienceless inter- 
ests. Under the mantle of his protection the formation of 
trusts went on apace and their depredations accumulated 
until even the sounder elements began to look upon them 
as a menace. Likewise, with the active support of Presi- 
dent McKinley, he fostered a tariff system which was 
developed in the interest of a privileged few and, in the 
light of later events, led to disaster in the markets of 


the world. Conceived originally as an aid to "infant in- 
dustries", the protective tariff ultimately became an in- 
strument for the extortion of unconscionable profits 
by industrial giants. 

Having won the campaign of 1896 on the "sound 
money" issue, it was not until late in 1900 that the gold 
standard was actually established by law. This was 
largely due to the emergency arising out of the short- 
lived Spanish-American War, during which all contro- 
versial questions were laid aside. Hanna was against 
the war, it may be said in passing, as "bad for business", 
and his influence undoubtedly delayed the issue, but the 
country's moral sense was aroused by the sufferings of 
the Cubans and in the end he was forced to give way be- 
fore public opinion. In the meantime, however, by a 
lucky stroke of fate, two things happened that settled 
the money question for years to come. During the clos- 
ing years of the century engineers had perfected a 
method of extracting gold by the cyanide process which 
added enormously to the percentage of recovery and at 
about the same time a great gold strike was made in the 
Yukon district of Alaska. Supplemented by the discovery 
of mines in South Africa which could be practically 
worked by the cheap lode, or deep-reef, mining process, 
these events actually doubled the world's gold supply 
within the space of a few years and tended definitely to 
raise the general level of prices. Likewise, they removed, 
practically the only argument that the "Free Silverite" 
had in his kit and relegated the whole question to the 
discard for thirty years or more. Lately it has arisen 
again to perplex us, but that is another matter. 

In order to understand the "sound money" contro- 
versy which raged throughout the country during the 
latter part of the century, it is necessary to review the 


course of fiscal developments from the beginning of the 
Civil War. When the war opened the country was on a 
gold basis, but for the purpose of financing the war it 
became necessary to increase the existing circulating 
medium by the issuance of other forms of currency. 
Much of this was fiat money, based on the mere promise 
of the government to pay at some undetermined date 
without specific provision for redemption. This was a 
process of inflation and, in accordance with the time- 
proven rule that cheap money will always drive out 
good money, it was not long before gold began to go 
into hiding. The dollar became worth only fifty cents 
in gold. 

Following the Civil War this process was reversed 
and the volume of currency was gradually contracted. 
In less than fifteen years paper money was decreased 
from about $1,000,000,000 to $750,000,000, or from 
$31.18 per capita in 1865 to $16.25 in 1878. Naturally 
this weighed heavily on the debtor, who found it cor- 
respondingly difficult to find money of any kind, gold 
or paper, with which to pay his debts. As if this were not 
enough, during the same period the production of gold 
began to decrease and this process was continued right 
up to the late Nineties. From 1865 to 1890 the world 
output of gold decreased from $129,000,000 to $118,- 
000,000 per annum, in the face of practically 100% in- 
crease in population in the United States, thereby creat- 
ing a further shortage of money. It is not difficult to 
understand that the increase in the number of people 
who required gold to pay debts or for other purposes, 
accompanied by decreasing production, caused wide- 
spread suffering and brought about growing discontent. 
In order to offset this condition at one time Congress 
provided for the limited coinage of silver and put into 


circulation some hundreds of millions of dollars of silver 
certificates, but this action was undone through later 
legislation withdrawing the coinage of silver, stigma- 
tized as the "Crime of 73". 

During all these years it is to be borne in mind that 
prices were going down and, conversely, gold was go- 
ing up in value, so that the farmer who had borrowed 
$1,000 in the Sixties or early Seventies, when the loan 
could be paid off through the sale of 1,000 bushels of 
wheat, found ten years later that it required 2,000 
bushels of wheat to pay off the same loan. As it hap- 
pened, the farm population, or debtor element, was 
located largely in the West and the banker, or creditor 
element, was located in the East, and it followed there- 
fore that the two sections of the country were arrayed 
against each other. The farmer looked upon the East 
as the "enemy" and the banker looked upon the western 
farmer as the embodiment of socialism and other de- 
structive forces. In this frame of mind the country came 
to the election of 1896, when Bryan raised the standard 
of "Free Silver" and won the Democratic nomination 
for the presidency by his "Cross of Gold" speech, which 
is recognized as one of the great oratorical efforts of all 
time. But the East won the election, largely through the 
efficient organization methods and liberal campaign 
chest provided by Mark Hanna, and the silver question 
was settled, for the time being at least. 

So much for the money question. It was different with 
the tariff. This was a question that had engaged Presi- 
dent McKinley's attention in Congress, where his name 
first came into prominence as the author of the McKin- 
ley Bill, practically the only measure of any importance 
incidentally for which McKinley was responsible during 
his legislative career. Immediately upon assuming the 


presidential chair McKinley seized upon the tariff as a 
medium through which to establish a national policy and 
naturally his policy developed along high protective 
lines. No less than Hanna, McKinley had a deep-seated 
respect, not to say reverence, for the business interests 
and of course he was indebted to them for moral and 
financial support. They lost no time, be it added, in 
presenting their account for payment and the Dingley 
Tariff Bill was the result of their combined insistence 
and McKinley's religious faith in the god-given benefits 
of a protective tariff. In this he was willingly abetted by 
Hanna, who saw in the tariff a means of perpetuating 
prosperity and the rule of the Republican Party, which 
were one and the same thing in his estimation. The 
Dingley Bill restored the rates of the pre-Cleveland era 
and handed a bounty of a good many million dollars 
to the leading industries of the country. Likewise it 
fastened upon the nation a system which was later 
fraught with consequences of vast import and, in the 
opinion of economists, had more than anything else to 
do with the depression of the Thirties. 

Broadly speaking, the protective tariff was a little 
brother to the Trusts. In the process of organizing the 
early trusts their capitalization was amply watered. As 
a rule bonds and preferred stock were issued to the 
amount of the actual values involved and the promoters' 
and bankers' profits were represented by common stock, 
which had little or no actual value at the time of issu- 
ance. Thus, in forming the U. S. Steel Corporation, 
$304,000,000 of bonds, $432,354,218 of preferred 
stock and $430,827,908 of common stock, or $1,167,- 
182,126 all told, were issued to purchase outstanding 
securities in ten corporations to the amount of $841,- 
846,500 and to provide $25,000,000 working capital. 


In other words, the bankers took down or distributed a 
profit in excess of $300,000,000. Not a bad day's work. 
In forming the Wire Trust John W. Gates is credited 
with having secured a promoter's profit of $26,000,000 
in common stock. There was no banker's profit in the 
formation of Standard Oil, since this was a personal 
undertaking of John D. Rockefeller, whose profits were 
represented wholly by the increased value of his hold- 
ings and those of his associates. 

During the early days, with a few exceptions (notably 
Standard Oil, which paid dividends ranging from 40% 
upwards practically from its inception), the trust man- 
agements were hard put to earn a return on this watered 
stock and the tariff substantially eased their burden by 
making it possible to accumulate profits which were en- 
tirely out of line with previous experience. The pressure 
on Congress from this source was unrelenting and by 
lining up solidly behind the Republican Party, which 
was also the party of sound money, their objectives were 
accomplished in full measure. So greedy were these in- 
terests and so insistent the bankers behind them who 
looked to increasing earnings for stock market profits, 
that the process of raising the tariff has continued with- 
out interruption, at least during the Republican Party's 
tenure of office. Thus, the tariff rates of the Smoot- 
Hawley Bill, which was adopted during the Hoover ad- 
ministration, just prior to the existing depression, aver- 
aged approximately twenty per cent in excess of the 
preceding Fordney-McCumber Act. 

One of the chief beneficiaries of the protective tariff 
was the steel industry, which was dominated by Andrew 
Carnegie up to the turn of the century. Shrewd, re- 
sourceful and ruthless, this peppery little Scotchman 
founded the industrial empire which J. P. Morgan, the 


elder, later welded into the U. S. Steel Corporation. An 
infallible judge of men, it is said that in his time Carne- 
gie made more millionaires than any other captain of 
industry, with the possible exception of John D. Rocke- 
feller. It is possible that the real inside story of U. S. 
Steel will never be known. There are two versions. One 
holds that the canny Scot, weighed down by the burdens 
of management, sought to rid himself of his gigantic 
properties and unloaded them on Morgan at a price. 
The other says that Morgan took Carnegie's "candy" 
away from him. Probably neither is right, since it is 
doubtful that either of two such able men could get the 
better of the other in a deal of this magnitude. At all 
events, the deal was one that worked out to the benefit 
of both principals and strangely it caused no loss to the 
investor, notwithstanding the ocean of water that was 
pumped into the capital structure of the corporation. 
Charles M. Schwab was the go-between in the negotia- 
tions that led up to the formation of the trust. One of 
Andy's boys, smooth-spoken and siren-tongued, he con- 
vinced Morgan of the advantages to be derived from the 
great consolidation and in return was chosen to be its 
first head, while Carnegie retired to his beloved Scotch 
hills with some hundreds of millions of U. S. Steel bonds, 
which later blossomed forth in countless libraries strewn 
over the length and breadth of these United States. 
Subsequently Schwab founded the Bethlehem Steel Cor- 
poration and assumed direction of its activities, from 
which he emerged in 1932 to announce that there "were 
no more rich men". 

Following his achievement in putting together the 
U. S. Steel Corporation, J. P. Morgan became the 
dominating figure in the financial world. Towering head 
and shoulders above the ranks of lesser financiers, he 


was recognized as the oracle of Wall Street and, by all 
odds, its first citizen. A power in finance as far back as 
1894, when he came to the rescue of the Cleveland 
administration with an offer to buy $65,000,000 of 
government bonds, as part of a program to maintain the 
gold standard, (netting incidentally a profit of $5,000,- 
000 on the transaction), his interests were worldwide 
and his house took the lead in the vast program of in- 
dustrial financing and refinancing that occupied the 
bankers during the first decade of the new century. 

As a class, the railroads had been crippled by the 
depression of the Nineties. Practically one-quarter of 
the total railway capitalization of the country went 
through bankruptcy, but Morgan quickly brought order 
out of the chaos. Starting with the Richmond and West 
Point Terminal Company, (which formed the nucleus 
of the Southern Railway), and including the Northern 
Pacific, Lehigh Valley, Erie and New York, New Haven 
and Hartford, Morgan put into effect reorganization 
or refinancing schemes that soon placed the railroads 
of the country on a sound basis. In this he was helped 
by the rapid recovery in business that set in toward the 
end of the century. Gradually his chief interest became 
centred in the New York, New Haven and Hartford, 
which he built up into a formidable system, and in the 
Northern Pacific, where his interest brought about one 
of the most spectacular and most disastrous financial 
events of our times the Panic of 1901. 

In his Northern Pacific operations Morgan early be- 
came associated with James J. Hill, whose foresight and 
administrative capacity had been responsible for the 
development of the Great Northern prior to this period. 
Together they acquired control of the Northern Pacific 
then a bankrupt "streak of rust" bringing some 


1 1,000 miles of track in seven northwestern states under 
their joint domination. 

In the meantime another railway financial and operat- 
ing genius had come to the fore in the person of E. H. 
Harriman, who had accomplished even more notable 
results in reorganizing and building up the Union 
Pacific. Despite his obvious abilities, Harriman was not 
the type of man that appealed to Morgan, who was as 
firm in his dislikes as in his likes. In recognition of his 
start as a floor broker on the New York Stock Exchange, 
Morgan was wont to refer to Harriman slightingly as 
a "two-dollar man" and on other occasions did not hesi- 
tate to call him a "sharper", which in the language of 
the day meant a cheap fellow, not to be trusted. At con- 
siderable cost he was to revise his opinion of the "Little 
Giant" and ultimately recognized him as an antagonist 
worthy of his steel. Their first clash came over the 
Chicago, Burlington and Quincy, better known as the 
Burlington, which tapped the richest traffic country west 
of the Mississippi. Hill wanted it as a feeder to the 
Great Northern and Northern Pacific. Harriman 
wanted the road to shut off the spread of any other sys- 
tem to the coast. By a quick move Morgan and Hill 
bought the Burlington on behalf of their two lines, thus 
leaving Harriman "out in the cold". In an effort to re- 
pair the damage he approached them with a proposal 
to share control, but they rejected it. Failing in this, 
Harriman set out to wrest control of the Northern 
Pacific from Morgan and Hill, since the road owned a 
half interest in the Burlington. Aside from bonds, the 
capitalization of the road consisted of $80,000,000 of 
common stock and $75,000,000 of preferred stock, 
which was retireable at the will of the directors, in 
which event the common would control the entire situa- 


tion. At the time that the battle started Morgan owned 
some 40,000 shares of common stock, which he figured 
was enough to control, along with other stock in friendly 
hands ; but this stock did not all stay put. Harriman was 
backed by Jacob H. Schiff, of Kuhn, Loeb and Company, 
who were his bankers, and together they set out to buy 
up all available stock, but they worked quietly and had 
made considerable headway before the Morgan-Hill 
crowd woke up. Naturally their buying sent the price of 
the stock up, but this was attributed to bullish sentiment 
arising out of the acquisition of the Burlington and 
caused no immediate concern to the Morgan interests. 
Not expecting an attack of such audacity, the Morgan 
office was lured by the high price at which NP was sell- 
ing to unload some of their own holdings. Within a 
month they sold almost 15,000 shares, practically all of 
which went to Harriman, and reduced their own hold- 
ings to about 25,000 shares. 

Morgan was in Europe at the time and Hill was in 
Seattle. Suddenly Hill got a "hunch" that something 
was wrong and headed East as fast as special trains 
could carry him. By the time he arrived Harriman had 
secured control of the preferred stock and was only 
about 40,000 shares short of control of the common. 
Hill sent a frantic cable to Morgan and Morgan cabled 
back to buy control a matter of 150,000 shares u at 
the market". At the same time Harriman issued an 
order to buy the 40,000 shares that he needed, also at 
the market, and the battle was on. "Jim" Keene, a well- 
known stock manipulator, handled the Morgan end 
and so well did he work that within thirty-six hours he 
had the stock, but in doing so he had shot the market up 
40 points. 

Between them, by this time, Morgan and Harriman 


had physical possession of practically every share of 
Northern Pacific outstanding. Not knowing this and 
realizing that the stock was selling far above actual 
value, the speculative fraternity began to sell the stock 
short and when they attempted to cover found that the 
stock was cornered. The price soared to $1,000 per 
share and panic ensued. Other stocks were unloaded at 
any price in order to obtain funds for settlement of the 
short account and many of the soundest stocks dropped 
fifty per cent in value. Morgan and Harriman were 
generous and permitted the shorts to settle at $150 per 
share, but that was the least part of the loss. Fortunes 
had been wiped out in the general collapse of the market 
and for a period it appeared that the whole country 
would feel the effects. But the storm passed. The panic 
was confined to the stock market and the march of 
progress was quickly resumed. 


DUDE, cowboy, soldier, statesman and master poli- 
tician, Theodore Roosevelt was certainly the most 
colorful as he was the most versatile man that ever sat 
in the President's chair. A scion of wealth, he was never 
in favor in Wall Street. "Unsafe", he was labelled at 
the start of his career and in his time he amply justified 
the term from the Wall Street point of view. Next to 
Harriman, whom Roosevelt later stigmatized as a 
"malefactor of great wealth", "Terrible Teddy" was 
Morgan's pet aversion and it was not long after he 
assumed the presidency that he set out to justify the 
enmity of this overlord of the financial world. 

Roosevelt began his administration with an announce- 
ment that was well calculated to allay the fears of Wall 
Street. He would "continue McKinley's policy", he 
stated immediately after the President's death, and 
this was known to be one of extreme benevolence toward 
Big Business. Likewise, in his first message to Congress 
he gave no indication of a crusader spirit, but business 
was sceptical none the less. Notwithstanding this feel- 
ing of insecurity, it is doubtful that Roosevelt at this 
time had any designs against Wall Street. It was only 
when the set purpose of the financial powers to rule the 
government became evident that he started to wield the 



"big stick". As it happened, the occasion concerned Mr. 
Morgan directly and was an outgrowth of the Northern 
Pacific struggle. 

In the final settlement between the Harriman and the 
Morgan-Hill interests their holdings in Northern Pa- 
cific had been pooled through the formation of a gigan- 
tic holding company, known as the Northern Securities 
Corporation. Its capitalization amounted to $400,000,- 
000 "large enough", as Morgan said, "so that nobody 
could ever buy it". Evidently he was not eager to get 
mixed up in another such cat-and-dog fight as Harriman 
had led him into. 

Although there is no evidence that the Northern 
Securities Corporation contemplated any further ac- 
tivity than to hold control of the Northern Pacific and 
Great Northern, it is quite within the scope of possi- 
bility that its ultimate object was to absorb and bring 
under its domination the entire railroad system of the 
West. Certainly such a purpose was close to Harriman's 
heart and it is likely that Harriman would have been 
the dominating factor in the management, since he had 
the peculiar faculty of being at the head of the table 
wherever he sat. "Let me be but one of fifteen men 
around a table", he once said to Otto Kahn, then com- 
ing up as a member of Kuhn, Loeb and Company, "and 
I will have my way". Few men of greater power of 
personality, more determined purpose or broader vision 
have ever flashed upon the horizon of Big Business. He 
was fit to be the running mate, not the antagonist, of 
J. P. Morgan. 

The formation of the Northern Securities Corpora- 
tion was greeted by a roar of disapproval from the 
West. To farmer and shipper alike it was just another 
link in the chain of industrial slavery which was being 


fastened upon them by the money powers of the East. 
But these protests did not avail. Morgan and Harriman 
went right ahead with their plans. Amid the blare of 
the press the Northern Securities Corporation was 
launched and the rival railroad powers turned in their 
stocks in exchange for stock of the holding company. 

Then suddenly, out of a clear sky, sounded a clap of 
thunder. Through his Attorney-General, Philander C. 
Knox, President Roosevelt filed a suit to dissolve the 
corporation, on the ground that it was a "monopoly in 
restraint of free competition". 

When the news came J. P. Morgan was at the dinner 
table at his Madison Avenue home, where he was host 
to some of his intimate associates. As he read the des- 
patch his countenance registered profound dismay, 
which later turned to anger. The next day he took the 
train to Washington. Bursting in on the President, he 
expressed his feelings in no uncertain terms. "If we 
have done anything wrong", he said, "send your man 
up to my man and they can fix it up". (The typical atti- 
tude of Big Business). Attorney-General Knox was 
there. "We don't want to fix it up", he replied. "We 
want to stop it". 

Taken aback, Morgan asked: "Are you going to at- 
tack my other interests, too ? The Steel Trust and the 
others?" "Certainly not", said the President, "unless 
we find out that, in any case, they have done something 
we regard as wrong." 

That was the last time that Morgan and Roosevelt 
ever met in private. From that day the financier was 
Roosevelt's bitterest enemy and he never lost an oppor- 
tunity to attack him. "Socialist" was the mildest of 
many scathing epithets that he applied to Roosevelt. 

Following the announcement of the suit, there was 


a near-panic in the stock market, fostered, no doubt, by 
the financial interests which sought to put the President 
in a bad light as a disturber of the business order. But 
Roosevelt was not to be stopped. The suit was pushed 
to a quick decision in the lower courts, which held in 
favor of the government. The real struggle came in the 
Supreme Court, which was obliged to wade through 
some 8,000 pages of briefs and records. On March 4, 
r904, almost within two years, the court decided against 
the IMorgan interests and the Northern Securities Cor- 
poration was ordered to be dissolved. Roosevelt's vic- 
tory was won by the narrowest sort of a margin. Dis- 
solution was ordered by a vote of five to four, but 
Justice Holmes dissented from the legal principle ap- 
plied by the court, making the actual division on the 
law four to four. Granting that the merger served the 
purpose of a monopoly, he drew a fine distinction be- 
tween the prohibition of acts in "restraint of trade and 
commerce" laid down in the Sherman Act, under which 
the suit was brought, and acts "in restraint of compe- 
tition", which he contended were not within the scope 
of the law. The issue was decided on broad grounds, as 
may be gathered from the concurring opinion trans- 
mitted by Justice Brewer : 

"If the parties interested in these two railroad com- 
panies", he said, "can, through the instrumentality of 
a holding company, place both under one control, then 
in like manner, as was conceded in the argument of one 
of the counsel for the appellants, could the control of 
all the railroads of the country be placed in a single 
corporation. The holders of $201,000,000 of stock in 
the Northern Securities Corporation might organize 
another corporation to hold their stock in that company, 
and the new corporation, holding the majority of the 


stock in the Northern Securities Corporation, and act- 
ing in obedience to the wishes of a majority of the stock- 
holders, would control the action of the Securities 
company, and through it the action of the two railroad 
companies. And this process might be extended until a 
single corporation whose stock was owned by three or 
four parties would be in practical control of both roads ; 
or, having before us the possibility of continuation, the 
control of the whole transportation system of the 

How nearly this picture conforms to the utility hold- 
ing company pyramids which came to be an outstanding 
phenomenon of the post-war financial era. 

Naturally Morgan was enraged at the outcome of 
the suit. Always contemptuous of opposition, he was 
not accustomed to defeat and to his dying day he never 
got over the effects of this experience. In his rage he 
went so far as to permit a director of the Steel Corpora- 
tion to offer a resolution at the next board meeting, 
instructing the chairman, Judge Gary who was not un- 
friendly with Roosevelt and, in fact, was almost a 
member of his "kitchen cabinet", to make no further 
visits to the White House, but calmer heads prevailed 
and the resolution was not adopted. 

In the settlement that grew out of the dissolution of 
the merger, more strife was stirred up between Harri- 
man and Morgan, but it ended in Harriman accepting 
stock of both Great Northern and Northern Pacific in 
return for his original holdings of Northern Pacific, 
which, it may be added, he turned over in the "boom" 
market that followed at a profit of $58,000,000, so that 
his passage at arms with the redoubtable Morgan was 
not without its compensations. 

When Roosevelt attained to the presidency he was 


not a "trust-buster", to use the language of the day. 
In fact, he deprecated much of the furor that had arisen 
over the activities of the money powers. It is possible 
that the Northern Securities case opened his eyes to the 
inherent dangers lying in the control of industry by self- 
willed and self-seeking individuals and the process was 
undoubtedly quickened by later events, but during the 
early days of his administration at least, he was not 
inclined to indulge in radical action at the expense of 
Big Business. Possibly his attitude was due in part to 
the fact that the Democratic party had made the trust 
issue its own and at heart Roosevelt was a party man. 
He could see no good in Nazareth if the Democrats 
were in town. As a matter of fact it is doubtful that he 
had given any real thought to the subject and so we find 
him in his first message to Congress "straddling", for 
one of the few times in his life. "There have been abuses 
connected with the accumulation of great fortunes", he 
said, "yet it remains true that they confer immense inci- 
dental benefits upon others". Then, rallying to the de- 
fense of the system which his party had sponsored, he 
adds vehemently, "It is not true that the rich have 
grown richer, the poor poorer. . . . Much of the an- 
tagonism to great fortunes is without warrant." 

But Roosevelt was not to be allowed to remain in this 
complacent frame of mind. Events moved faster than 
he did. The Northern Securities suit had barely been 
launched in the courts when he was forced to enter the 
lists in another sphere in opposition to the forces of 
organized wealth. For a decade or more trouble had 
been brewing in the coal industry. Underpaid and op- 
pressed by working conditions that were little less than 
inhuman, the miners had formed a union which was 
headed by a man of fine and vigorous personality, John 


Mitchell. Mitchell had been a thorn in the side of the 
operators. Under his leadership, step by step, the union 
had been strengthened; the operators had been forced 
to make concessions. In 1900 the anthracite miners 
struck for a ten per cent increase in wages and won 
largely under the threat to bring about a general deser- 
tion of labor from the Republican party during the 
political campaign of that year. The strike was barely 
ended when they began to press for further advantages. 
As it later developed, the miners had real grievances, 
but it appeared that their case was not to be tried on its 
merits. On the opposite side were the railroad coal com- 
panies, which were headed by an imperious, tactless and 
short-sighted spokesman, George F. Baer, President of 
the Reading Railroad, who soon prejudiced the country 
against their case, if they ever had any. In writing a 
letter to a citizen who had appealed to him to end the 
strike he had the misfortune, or ill-judgment, to use the 
following language : 

"I beg of you not to be discouraged. The rights and 
interests of the laboring man will be protected and 
cared for not by the labor agitator, but by the 
Christian men to whom God, in his infinite wisdom 
has given the control of the property interests of the 
country and upon the successful management of which 
so much depends". 

Promptly he was dubbed "Divine Right Baer" and 
the appellation stuck. 

Following fruitless efforts to adjust their grievances, 
the miners struck again, in May, 1902. Throughout the 
Summer no coal was mined and by Fall both coal yards 
and coal bins were empty. It looked as if the country 


would have to go through the Winter without coal, 
with all the physical suffering and economic dislocation 
that was certain to follow. In the large cities the price 
of coal went to $28 and $30 per ton. 

Finally the President was forced to take notice. From 
many sources he had received appeals to mediate or to 
end the strike by government authority and he was 
thoroughly aroused to the gravity of the situation. But 
he proceeded with caution. At the start he found that 
he had to deal with his sworn enemy, J. P. Morgan, 
who was then at the height of his rage. Morgan stub- 
bornly refused to exert his power to make the operators 
adopt a reasonable stand. He gave Baer a free hand. 

In the meantime the issue between the miners and 
the operators had simmered down to one of union recog- 
nition. Regardless of increasing suffering, Baer refused 
to treat with representatives of the miners. He regarded 
the miners as "his" men, and professed to be willing to 
discuss the questions at issue but emphatically rejected 
all overtures from Mitchell and the union officials. 
Roosevelt injected a third element into the situation 
the public, which brought forth a storm of criticism 
from the operators and their friends, as they refused to 
admit that the public had any legitimate interest in their 
property the mines. It looked as if the public was in 
for a bad winter. 

Roosevelt invited operators and union leaders to con- 
fer with him in Washington. After considerable parley- 
ing a meeting was arranged. The operators were in an 
ugly mood obdurate, not to say offensive in manner. 
Roosevelt was exasperated. The only calm, sensible 
person at the meeting was John Mitchell, who made a 
moving appeal, but it fell on deaf ears, so far as the 
operators were concerned. The meeting broke up in 


confusion. After it ended the operators were quoted as 
saying that they regarded the president's activity "as 
an intrusion upon a situation that in no wise concerned 

Roosevelt kept his temper but registered a definite 
determination to bring the operators to terms. At first 
he turned to Ex-President Grover Cleveland and sought 
to have him act as mediator, but this plan ran up against 
the fundamental objection of the operators to consider 
any settlement that involved presentation of the miners' 
side of the case by their chosen representatives, the 
union officials. Next he decided on a bold move. Keeping 
his purpose secret even from the cabinet, he proposed 
to declare martial law and as commander of the nation's 
armed forces to put the entire coal fields under the 
jurisdiction of the army, with instructions to operate the 
mines until such time as a settlement could be reached. 
Rightly he figured that the operators would resent this 
action bitterly, as it put them out of the use of their 
property, which they assumed the right to use in their 
own fashion, without regard to the interests of the coal- 
using public. Practically the only one to whom the Presi- 
dent confided his plan was Major-General Schofield, 
whom he had selected to do the job for the army. His 
provisional instructions to Schofield read that "if, in 
case the operators went to court and had a writ served 
on him, he would do as was done under Lincoln, simply 
send the writ to the President", and the old soldier was 
prepared to carry out his orders. Roosevelt, in turn, was 
resolved to risk impeachment. There was no leak, but 
somehow a suspicion of what Roosevelt had in mind oc- 
curred to the operators and immediately threw them into 
a panic. Grasping the situation with his usual intuition, 
Roosevelt quickly extemporized a proposal for both 


miners and operators to submit their claims to a com- 
mission which he would appoint. There ensued a lengthy 
and senseless argument as to the make-up of the com- 
mission, during which Morgan forgot his enmity long 
enough to permit his junior partners, Robert Bacon and 
George W. Perkins who were personally friendly with 
Roosevelt to use their influence upon him. The ope- 
rators quibbled over the inclusion of a labor man in the 
commission, but Roosevelt finally got around this by 
designating the head of the Order of Railway Conduc- 
tors as a sociologist, and not as a laboring man, and 
everybody was happy. The Commission was appointed, 
the men went back to work, coal was mined and shipped 
and the public was saved the misery of a heatless, light- 
less winter. 

When the Commission brought in its report it was 
more or less a compromise. It provided for a retroactive 
increase in wages, a reduction in the workday to nine 
hours, no change in the system of payment (which the 
miners had asked for) and a working agreement be- 
tween the miners and operators without open recogni- 
tion of the union. All parties accepted the award and 
the industry soon got back to normal, but Roosevelt 
acquired a new sense of the arrogance of organized 
capital and undoubtedly built up the mental complex 
which later led him on a wide front to bring the methods 
and practises of Big Business within reasonable control. 
Doubtless this reaction was intensified by the size of the 
majority which he received in the election of 1904, after 
which he went on record with the statement that he was 
no longer a "political accident". He was ruler in his 
own right. 

Since the "Embalmed Beef" scandals, which had 
been an incident of the Spanish-American War, the meat- 


packing industry had been under suspicion. This suspi- 
cion was brought to a head by a book that was written 
by Upton Sinclair and obtained a wide circulation in 
19. Q. 6, "The Jungle", which purported to portray con- 
ditions in the Chicago Stock Yards. The book swept the 
country like wildfire and resulted in a veritable ava- 
lanche of protest. Consummately handled by an artist 
and a propagandist of no mean ability, it told the story 
of a Lithuanian peasant who was caught in the mael- 
strom of immigration that carried some hundred thou- 
sand of his people over-seas during the Nineties and 
landed him in the Stock Yards. There he became a prey 
to the evils of industry and politics combined and, inci- 
dentally, was a witness to meat-packing methods which 
shocked the country when they got into print. In their 
greed for profits the packers were represented as making 
use of diseased and condemned meat, of scraps that 
were not fit for the table ; they bought off government 
inspectors, adulterated their products in fiendish ways, 
violated any ordinance of City or State that interfered 
with their practises or profits, conducted their establish- 
ments in unspeakable filth and finally landed the hero in 
jail, from which point tragedy constantly dogged his 
heels. It was an ugly picture and one well calculated to 
arouse an already suspicious public. That it resulted in 
no actual benefit to the Socialist cause, which was its 
avowed object, was an ironic, if unimportant incident, 
since the book unquestionably served a larger purpose, 
overdrawn as it was. 

Coming, as it happened, just at a time when a group 
of the leading packers had been indicted by the Federal 
Government as a monopoly in restraint of trade, in line 
with a general effort on the part of the administration 
to stamp out monopoly, the book focussed attention on 


the meat-packing industry and a broad movement was 
started immediately to bring about reform in the food 
and allied drug industry. Prior to this time the subject 
had not loomed large in the public consciousness. There 
had been some desultory sniping at the manufacturers of 
certain food products, chiefly preserved and canned 
goods, who indulged in the use of chemical substitutes 
and preservatives on a large scale. By degrees these 
practises had reached a point where spoiled and unsale- 
able butter was made over by the addition of chemicals 
and sold for fresh; eggs in all stages of decomposition 
were deodorized with formaldehyde and supplied to the 
trade as "new-laid" ; many fruit preserves were put up 
without a vestige of fruit having entered into their mak- 
ing ; catsup was invariably made from the waste products 
of canning pulp, skin and rind of over-ripe tomatoes, 
coal-tar derivatives and benzoate of soda or salicylic 
acid. There were many "patent preservatives" in chem- 
ical form which were "guaranteed" to keep meat, fish, 
poultry, etc., for any length of time. Often these claims 
were without foundation and resulted in sickness or 

In the meantime both State and Federal Departments 
of Food or Agriculture had assembled valuable data, 
which was later to be the basis of effective legislation. 
Naturally, dishonest or avaricious manufacturers threw 
every conceivable obstacle in the way of such efforts. 
Their profits were large and growing larger with every 
new form of device which could be invented to deceive 
a gullible public. It was an Age of Chemistry, and they 
shrewdly encouraged the notion, while clean, properly 
prepared food products found themselves at the mercy 
of cheap adulterated goods. 

In addition to this, the patent medicine business had 


abounded in reckless and harmful mistatements and 
exaggerations from time immemorial and in the public 
mind it was linked up with the dishonest food manufac- 

The storm began to break with a fusillade of exposure 
articles, which appeared in several of the leading maga- 
zine publications, at a cost incidentally of considerable 
advertising revenue to the publications in question. As 
a characteristic incident, one of these magazines* repro- 
duced an advertisement of Lydia E. Pinkham' s Vege- 
table Compound, in which it was stated that "Mrs. 
Pinkham, in her laboratory at Lynn, Mass., is able to 
do more for the ailing women of America than the 
family physician. Any woman, therefore, is responsible 
for her own suffering who will not take the trouble to 
write to Mrs. Pinkham at once" On the same page the 
magazine published the photograph of a tombstone in 
Pine Grove Cemetery at Lynn, Mass., showing an in- 
scription that plainly indicated the death of Mrs. Pink- 
ham some twenty-two years before. There were many 
similar frauds which duly came to light. 

As a result of these exposures, as well as the con- 
structive work of State bureaus, many of the States 
adopted legislation aimed at the worst practises both in 
the food and medicinal fields. These efforts finally won 
the support of an able and distinguished advocate in 
the person of Dr. Harvey W. Wiley, Chief Chemist of 
the Department of Agriculture in Washington, who be- 
came the leader in the crusade for pure foods and drugs. 
From the platform, in the public press and before Con- 
gress he waged a determined war to do away with the 
abuses in these fields and his efforts finally resulted in 

* The Ladies Home Journal. 


the formulation of a Food and Drug Act, whose passage 
Roosevelt recommended to Congress in his annual mes- 
sage delivered December 5, 1905. The bill was spon- 
sored by Senator Hepburn, of Idaho, who had been 
active in earlier efforts to obtain action of this sort, 
which had been unsuccessful. 

From the moment of its introduction the bill faced the 
opposition of the Republican leader, Senator Nelson 
W. Aldrich, who was also the leader of the forces of 
Big Business in the Senate. Repeated efforts were made 
to amend or emasculate the bill and it brought about 
one of the greatest legislative wrangles of our times, 
but in the end Roosevelt applied the full pressure of his 
power and personality and, with slight modifications, 
the bill was adopted. In the struggle in Congress over 
the Food and Drug Act was laid the groundwork of the 
cleavage in political philosophy which later differenti- 
ated the regular and progressive wings of the Republi- 
can party. 

For the third time Roosevelt had come into conflict 
with the money powers and again he had bested them. 
The fourth and last battle was a reversion in a sense to 
the scene of his first struggle the railroad field. 

For a quarter of a century or more railroad rates and 
railroad regulation had been a bone of contention be- 
tween the so-called conservative interests and an ele- 
ment inside and outside of Congress variously stigma- 
tized as radical or demagogic or socialistic, according 
to the degree of antagonism represented. In 1887 the 
forces of Big Business had thrown a sop to this element 
in the form of the Cullom Act, but it was lacking in 
teeth. The bill set up the Interstate Commerce Commis- 
sion, but gave it neither power nor authority. Roosevelt 
determined to remedy this deficiency. To begin with, his 


purpose was merely to endow the Commission with 
powers of review, as he said in his annual message to 
Congress, on March 6, 1904, "While I am of the opin- 
ion that at present it would be undesirable, if it were 
not impracticable, finally to clothe the Interstate Com- 
merce Commission with general authority to fix rates, 
I do believe that, as a fair security to shippers, the Com- 
mission should be vested with the power, where a given 
rate has been challenged and after a full hearing found 
to be unreasonable, to decide, subject to judicial review, 
what shall be a reasonable rate to take its place; the 
ruling of the Commission to take effect immediately, 
and to obtain unless and until it is reversed by the court 
of review." 

But this was not enough to satisfy the radical element 
in the House and they promptly passed a bill that went 
much further. The bill was sponsored by William P. 
Hepburn, of Iowa, and it got no further than the House 
during the short session that ended March 4, 1905. In 
the next session the House repassed the bill and it went 
to the Senate, where the issue was immediately drawn 
between the friends of the railroads and their so-called 
enemies, mainly the Western senators. 

Roosevelt was not unfair in his attitude toward the 
railroads. He recognized the fact that they represented 
an investment of some fourteen and a half billion dollars 
and this was largely in the hands of small investors or of 
banks and insurance companies whose reserves were in- 
vested in their bonds. He was not interested primarily 
in "swatting the railroads", as many members of Con- 
gress were, but was concerned chiefly in protecting the 
shipper, who was largely at their mercy. On the other 
hand, the bill as it came to the Senate practically gave 
the Interstate Commerce Commission unlimited power 


to enforce rates, which, in effect, might readily be unjust 
and so an invasion of property rights. As Senator Knox 
put it: "When we recall that, as estimated, over ten 
thousand millions of dollars are invested in railroad 
property, the proposition that such a vast amount of 
property is beyond the protecting clauses of the Consti- 
tution, that the owners may be deprived of it by the 
arbitrary enactment of any legislature, State or nation, 
without any right of appeal to the courts is one which 
cannot for a moment be tolerated." And further : "From 
the decisions of the Supreme Court it will be seen that 
railroads have a constitutional right to just compensa- 
tion for services rendered, and that by direct act of 
legislation or indirectly through a legislative body, as 
through the Interstate Commerce Commission, they 
cannot be deprived of this right. They are entitled to 
their day in court." 

In the Senate a movement developed to provide for 
a judicial review of orders of the Commission fixing 
rates and an amendment to this effect was adopted. Of 
course, this was a negative advantage, so far as the 
railroads were concerned, as the bill definitely estab- 
lished the rate-making principle and the provision for 
a review has never been resorted to with any success by 
the railroads. 

Starting as a moderate, leaning rather to the side of 
the railroads, in the course of the Senate discussion 
Roosevelt gradually swung around to the opposite posi- 
tion and in doing so again furnished Wall Street with 
proof of his enmity. Again he was stigmatized as a 
"socialist", but he took up the cudgels stoutly in his own 
defense. Denying the imputation, he went on record 
openly with the statement that "Public ownership of 
railroads is highly undesirable and would probably in 


this country entail far-reaching disaster". Likewise he 
asserted that "the corporation has come to stay, just as 
the trade union has come to stay. We must all go up or 
down together". He had, he added, "no hostility to the 
railroads. On the whole the railroads have done well 
and not ill. The question of transportation lies at the 
root of all industrial success". 

Notwithstanding these kindly sentiments, Roosevelt 
approved the Hepburn Act exactly as it came from con- 
ference and Wall Street gave him credit only for "mealy 
mouthings". It was set down as just another victory for 
the forces of discontent, to whose leadership Roosevelt 
had definitely succeeded in the estimation of Big Busi- 
ness. But, in the interest of justice, it is only fair to 
record that the real enemy of organized wealth during 
this hectic period was not Roosevelt; it was Wall Street 
itself, which encouraged practises and abuses in the 
promotion and management of great properties that 
could not fail to arouse sentiment against them. One by 
one, these malefactions came to light and in the end all 
corporate bodies were tarred with the same stick. 

To cap the climax, the country was suddenly brought 
face to face with the fact that its most beneficent and 
sacred institution Life Insurance was just as rotten 
at the core as other manifestations of Big Business. 

But this is a story in itself. 


LIKE the savings bank, the institution of Life Insur- 
ance had acquired a sacrosanct character in this country. 
The refuge of the widow and the orphan, it was re- 
moved in the public mind from the malevolent environ- 
ment of ordinary business. Not so among the Wall 
Street fraternity. Enviously the bankers looked at the 
immense resources of the life insurance companies and 
the constant stream of gold that poured into their 
treasuries. Already, before the turn of the century, 
Morgan practically controlled the New York Life In- 
surance Company; within a few years he was to acquire 
a voice in the management of Mutual Life, and partly 
as a result of the series of events that we are about to 
relate he was also to add the Equitable to his interests. 

As an indication of the financial scope and importance 
of these institutions, it may be cited that these three 
companies alone controlled resources in excess of 
$1,300,000,000 and their combined cash income ex- 
ceeded $268,000,000 per annum. In addition to this 
they provided a livelihood for a vast army of employees 
and maintained a corps of agents that tapped the hidden 
wealth of the smallest hamlet in the country. 

The Equitable Life Assurance Society one of these 
three had been founded in 1859 by Henry B. Hyde, 



who had obtained a thorough schooling in the business 
during a seven-year connection with the Mutual Life 
Insurance Company. Losing his job on account of a 
display of too much aggressiveness in going after busi- 
ness, he organized the Equitable through the simple 
expedient of renting a vacant office in the Mutual Build- 
ing and hanging up a sign. From this beginning, with 
borrowed furniture and office equipment and a few 
dollars invested by friends, including some wealthy and 
influential members of the Fifth Avenue Presbyterian 
Church, which he attended, he set up in opposition to 
his former employers and when he died forty years later 
he left a company that was one of the three largest in 
the world and a twenty-three-year-old son who, at his 
death, became the autocrat of half a billion dollars of 
assets and the custodian of the interests of 600,000 
policy holders. 

Among the circle of church acquaintances whom 
Hyde had interested in his venture at the start was the 
Alexander family, several of whom became represented 
in the management and, in fact, lent considerable dig- 
nity to the undertaking. The head of the family, or 
dynasty, was James W. Alexander, who had been inti- 
mately associated with Hyde from the early days of the 
Equitable and at his death was named a trustee of his 
then great estate. 

Ill-equipped to succeed his father in the direction of 
an institution of such magnitude as the Equitable Life, 
and having his head turned by his new honors, which 
included directorates in half the important financial 
institutions in New York and in many of the leading 
corporations throughout the country, the son, James 
Hazen Hyde, soon managed to achieve a reputation for 
the lavishness of his entertainments and the uselessness 


of his exploits but did little that redounded to the 
greater glory of the Equitable. The newspapers were 
full of his doings, including a dinner which he gave to 
five hundred of the fashionable set at a cost of $125 per 
plate, paid for, as it later developed, out of Equitable 
funds his erection of a chateau on Long Island and 
importation of French chefs and maitres des chevaux. 
Even his occasional journeys to the Equitable office were 
a parade, according to the newspaper reports of the day, 
"as he drove jauntily down town in his private hansom 
cab, a bunch of violets nodding at the side of the horse's 
head, another bunch nodding from the coachman's hat 
and a third bunch breathing incense from the buttonhole 
of the young man himself". 

Guarded by a host of secretaries and ensconced in 
one or another of four magnificent private offices, this 
exquisite presided over the affairs of the Equitable, at 
such times at least as other more important social mat- 
ters did not claim his attention. For a time, fortunately, 
he was able to rely upon the guiding hand of Trustee 
Alexander, but Alexander had little sympathy with his 
ways and soon became a critic, rather than an aid. Left 
to himself, young Hyde showed little more good sense 
in his business judgment than he did in his silly pleasures. 
Eager to be accepted in the street and among his society 
friends as a thorough-going good fellow, he was prey 
to every sharper who was able to approach him with a 
proper introduction, and it was charged that he lavishly 
handed out the funds of the Equitable, or affiliated 
financial institutions where its funds were deposited, on 
schemes of doubtful merit. Under the flattering tutelage 
of bankers and industrial leaders who were seeking ac- 
cess to the Equitable resources, it was not long before 
he learned many of the simpler tricks of finance, as it 


was understood in the Street how the vast funds held 
by a big insurance company or its affiliated banks and 
trust companies could be used legally and without im- 
propriety but with advantage to individuals in the man- 
agement; how they paved the way into underwriting 
syndicates or similar financial ventures which offered fat 
profits to the insiders. As a result bankrupt railroads, 
worn-out utilities, and broken-down industries fought 
for a place at the Equitable trough and not all went off 
empty handed. 

Alexander was not entirely without responsibility, or 
at least without knowledge, of many of young Hyde's 
acts, but he carefully avoided association with him in 
his undertakings. In fact, he had his own axes to grind. 
Closely allied with an important Wall Street banking 
group, he was a party to many of their projects and 
through him the funds of the Equitable were always at 
their disposal. Seeking to strengthen their position, 
these interests fostered a whispering campaign which 
appeared to be directed against young Hyde, and soon 
rumors gained headway throughout the Street that all 
was not well in the Equitable, as indeed it was not. These 
rumors reached the ear of Joseph Jiilitzer, owner of 
"The New York World", who quietly scented a u story". 
Starting a quiet investigation, he soon gained possession 
of facts enough to warrant newspaper notice and spread 
them before the public in the pages of the "World". 

In the meantime an effort to deprive Hyde of control 
of the Equitable had begun to take form within the com- 
pany. Alexander finally joined the ranks of his open 
enemies and, headed by him, the chief officials of the 
Equitable united in a petition asking for his resignation 
and demanding a mutualization of the Society. Hyde 
was thoroughly taken aback, but not so easily disposed 


of. He decided to fight and the contest quickly became 
one between the two opposing sets of interests that 
sought favors from the Equitable the faction repre- 
sented by Hyde and the faction represented by Alex- 
ander. With Harriman on one side and the Morgan- 
Hill crowd on the other, the battle resolved itself into a 
renewal of the struggle over Northern Pacific which 
had occurred four years earlier. Hyde himself was now 
only a pawn in the game. 

Efforts were made to quiet the noise of the struggle, 
but Pulitzer was not to be denied. Sensing a desire to 
avoid disclosure, he unlimbered his big guns and pre- 
sented the facts, in so far as he got hold of them, with- 
out fear or favor. 

"There must be publicity", he demanded editorially, 
as the true situation began to come to light. "Purging, 
punishment and full restitution. Open the books 1 Let 
the policy holders know what has been done in secret 
with the money saved for the protection of widows and 
orphans. Let there be light ! There should be full pub- 
licity through legislative investigation. Investigate, gen- 
tlemen of the Legislature !" 

Under this assault on two fronts Hyde gave up the 
unequal fight and retired to the remoteness and more 
agreeable environment of Paris, where he has since 
been able to enjoy his French chateau, dogs, horses, 
stablemen and chefs without the pitiless publicity that 
beats upon the head of the Equitable. In accepting this 
defeat incidentally, to the great disgust of Harriman, 
he sold out his majority interest in the Equitable to 
Thomas Fortune Ryan, who paid the sum of $2,500,000 
for the doubtful privilege of collecting annually a divi- 
dend stipend of only $3,514, to which the shares were 
limited by the company's charter. Evidently there was 


something else that Mr. Ryan expected to get as part 
of the bargain, but the notoriety that arose over the 
whole Equitable situation cheated him out of the larger 
gain and he was later forced to take back his money and 
trustee his holdings for the benefit of the policy holders. 
J. P. Morgan provided the cash and became one of the 
trustees, thereby securing a voice in the control of the 
great institution. The Equitable now is a mutual com- 

Following the lead of the "World", other newspapers 
took up the Pulitzer cry and a widespread demand for 
an investigation appeared. In due course the Legisla- 
ture at Albany ordered an investigation not only of the 
Equitable but of all the life insurance companies. And 
so Charles Evans Hughes got his place in the sun, for 
he was selected to conduct the inquiry. 

At that time Hughes was comparatively unknown. 
Successively school teacher, practising attorney, invalid 
and college professor, he had achieved little in the way 
of a reputation, but in the general region of his luxuriant 
set of whiskers he carried a nose for figures and, as it 
later developed, a tenacious, inquiring mind. Quickly 
mastering the intricacies of life insurance and its relation 
to finance, Tie brought to light an array of facts that 
amply demonstrated the need for the investigation. 
Before his batteries the legal lights of Wall Street found 
their case hopeless, with the result that the actual con- 
ditions were spread upon the printed page where all the 
world might see them. Aside from blasting innumerable 
reputations that had stood as synonyms for integrity, 
here are some damaging facts that Hughes brought 

That the youthful and inexperienced Hyde drew 


yearly stipends from the Equitable and its affiliated 
companies amounting to $127,000. 

That nepotism was rampant in all the companies and 
any son or nephew of an important factor in the man- 
agement who was not on the payroll for $100,000 or 
better was "asleep at the switch". 

That enormous commissions were paid to favorites 
and relatives of officials who masqueraded as "General 

That the Equitable maintained on deposit at affili- 
ated or friendly trust companies upwards of $36,000,- 
000, or more than nine per cent of its total assets, on 
which it was paid interest at the rate of only two or 
three per cent, and to conceal this fact it made a practise 
of loaning out the bulk of these funds over each year 
end when the usual audit was taken. 

That the New York Life subscribed to $4,000,000 
of bonds in Morgan's ill-fated International Merchant 
Marine, a considerable part of which was hidden by 
false entries on the books. 

That another banking house Kuhn, Loeb and Com- 
pany unloaded on the Equitable, in which one of the 
partners was a director, over $50,000,000 of securities 
within a period of about five years. (This firm were the 
bankers for Harriman, who worked his way into the 
good graces of young Hyde and ultimately won a place 
on the Equitable board.) 

That, in order to get around statutory provisions in 
certain States and foreign countries against investing in 
stocks, the New York Life made fictitious loans running 
up into the millions, through its affiliated trust com- 
pany, to dummies (including a bond clerk and negro 
messenger boy) who, in turn, invested the money in 


stocks, in defiance of regulations, for the benefit of the 
insurance company. 

In addition to this, Hughes dug up the fact that prac- 
tically all companies were aligned with one political 
party or the other and diverted enormous sums secretly 
each year to taking care of their political fences. At 
Albany the Mutual Life maintained a residence which 
was used for this purpose later to be known as the 
"House of Mirth". Under cover of "legal expenses" 
this company paid out upwards of $350,000 in a single 
year and in its report the investigating committee went 
on record openly with the statement that this was "far 
in excess of the amounts required for legitimate pur- 
poses". Through one of its legal agents the New York 
Life Insurance Company disbursed the sum of $1,312,- 
197.63 as legal fees, in addition to ordinary outlays for 
insurance purposes and practically not a cent was ever 
accounted for. Under the heading of "Supplies" the 
Mutual, New York Life and Equitable reported com- 
bined expenditures of almost $3,000,000 a mere 
"blind", as it later developed, to conceal political ex- 

In the course of the investigation it developed that 
the four big companies made large contributions to the 
Republican National Committee at each national elec- 
tion and that the Mutual Life contributed regularly to 
the State Committee. It also appeared that Chauncey 
M. Depew received a retainer of $20,000 per annum 
from the New York Life while he was Senator from 
New York. Notwithstanding his sense of humor, the 
worthy senator found it difficult to explain this little 
item, but he derived some consolation from the fact that 
Democratic Senator David B. Hill had been on the 
Equitable payroll. 


Needless to say, the Hughes revelations brought 
about consternation which was not confined to financial 
circles. What is more surprising, they resulted in legis- 
lation that eliminated many of the evils that came to 
light and for the first time put the life insurance business 
on a sound and wholesome basis. Incidentally, although 
there were wholesale indictments of insurance company 
officials as a result of these revelations, no one was sent 
to prison, so far as can be ascertained; but practically 
all the presidents of the leading companies lost their 
jobs and there was a new deal all around. 

Unable to bear up under the loss of his reputation, it 
is said that the man who started it all, James W. Alex- 
ander, died of a broken heart. And Charles E. Hughes 
became the candidate of the Republican party for presi- 
dent in 1916. 


FOR TEN long years prior to 1907 the country had 
experienced increasing prosperity. Notwithstanding the 
crimes of Wall Street, the depredations of the Trusts, 
the greed and dishonesty of manufacturers, the suppres- 
sion of labor by injunction and otherwise, and despite 
the unsettling influence of Roosevelt, business had 
moved steadily forward. It was a period of good times. 
The evidence of this lay about on every hand. Wealth 
had accumulated. Palatial homes abounded. With heavy- 
handed prodigality the rich took over, one by one, the 
art treasures of the Old World. The continent was ran- 
sacked for paintings and sculptures, tapestries, mosaics, 
relics of gold, silver and bronze, altar-pieces, doorways 
and stairways of ancient and honored associations. Old- 
world castles were moved bodily across the ocean and 
re-erected in Long Island or on Michigan Boulevard. 
Magnificent public buildings came into being capitols, 
court houses, post-offices, museums, libraries and col- 
leges. At Yale, Harvard and Princeton was supplied a 
brand of social and intellectual veneer that enabled the 
coal-miner's or beef-packer's son to cover up the muck 
that surrounded his lowly origin. For the benefit of their 
daughters, railroad, steel and oil magnates bought Eu- 
ropean titles as casually as they bought wheat or hogs. 



It was the Gilded Age. America had been made over. 
No longer the heritage of the "free and the brave", it 
became the playground of the rich and they spent their 
fortunes with lavish hand. "Only three generations 
from shirt-sleeves to shirt-sleeves" became a by-word. 
In the midst of these external manifestations of pros- 
perity there were less discernible economic factors of 
vast significance. The banks were bursting with funds 
and money was easy. Coupled with this was a newly 
discovered interest in the stock and grain markets. Of 
course, there had always been speculators, but now the 
public began to take an interest. During the era of trust 
promotion vast amounts of common stock had been 
issued and the bankers found a rising market a con- 
venient aid in passing out their holdings to the public. 
Originally these stocks had little or no actual value but 
a beneficent tariff on the one hand and improvements 
in production methods on the other gradually built up 
their earning capacity. By 1906 U. S. Steel common was 
paying two per cent; the preferred was paying its regu- 
lar seven per cent. All stocks were moving up. Reports 
of "killings" in the Street began to get around and the 
less conservative opened margin accounts. To take a 
"flyer in the market" began to be a sign of financial 
acumen. It marked the corner druggist in Kankakee, 
Illinois, as kin to the Big Boys in Wall Street. Pennsyl- 
vania, New York Central, Pullman, Western Union, 
Westinghouse, General Electric and U. S. Steel were 
market leaders. Through their "Street" control the 
banks were led to help the good work along. Pools 
found it easy to get money. Everyone went into debt, 
the business man for the purpose of financing his grow- 
ing business, the speculator in order to add to his line. 
"Stock pyramiding" was born. 


During the early part of the year 1907 danger signals 
began to appear, but they were ignored by over-confi- 
dent speculators, as they always are. In March there 
was a near-panic in the stock market ; in August another, 
which threatened to assume the proportions of a real 
crash. In October the Westinghouse Manufacturing 
Company went into receivership, followed by the New 
York City Railways, and hard on their heels Charles 
W. Morse's consolidation of Atlantic Coast shipping 
companies went by the board. Morse was one of the 
younger brood of high financiers who flashed across the 
Wall Street horizon without the usual process of incu- 
bation that leads to financial prominence. Among his 
other achievements he had originated the system of 
"chain banking" and had built up a string of banks 
throughout New York City by employing the resources 
of each, as acquired, to purchase control of additional 
units. By restricting his operations largely to trust com- 
panies, which were state institutions and not subject to 
Federal supervision, he managed to conduct his banks 
in any manner that suited his needs or convenience and 
gradually involved them in various schemes of doubtful 
merit. Among this string of banks was the Knicker- 
bocker Trust Company, a sizable institution, which was 
headed by one of Morse's cronies, Charles T. Barney 
later to put a pistol bullet through his brain. 

As the month of October wore along money tightened 
up, currency began to disappear, the decline in stocks 
was accelerated and there were many premonitions of 
disaster, but the speculative element persisted in main- 
taining its "long" position in the market. As a part of 
these operations, an active pool was engaged in trying 
to corner the market in United Copper, but one of the 
insiders sold out secretly and overnight the corner was 


broken, heavily involving a firm of brokers who were 
closely identified with Morse. Instantly reports spread 
in the Street that the Morse banks had been u hit hard", 
as indeed they had been, since it later transpired that 
they were u holding the bag" for the ill-fated pool. One 
of the banks in question, the Mercantile National, ap- 
plied to the Clearing House Association for help and a 
hurried investigation disclosed the real situation and 
pointed to the Knickerbocker as being even more seri- 
ously involved. The Knickerbocker had some 17,000 
depositors, with deposits of about $35,000,000, and it 
was not believed that the Clearing House would allow 
the bank to fail. As a matter of fact, frantic efforts were 
made by a group of leading bankers to whip the bank's 
affairs into shape, but just as they were on the point of 
succeeding, one of the big down-town banks became 
panic-stricken and refused to continue clearing its checks. 
Word of this leaked out over night and in the morning 
when the bank's doors opened a long queue of depositors 
were waiting to withdraw their funds. Within two hours 
the vaults were empty and the bank suspended business. 
This started a run on other banks and the following 
morning the Bank of America went under. Terror now 
swept over Wall Street and spread throughout the 
country, amid tumbling stock and grain prices, and an- 
other major panic was on. Again the Cyclical Theory 
had been vindicated and the country faced the ordeal 
of panic, liquidation and readjustment which invariably 
precedes recovery. 

At this point, with unanimity, the financial world 
turned to its admitted overlord, J. P. Morgan, and 
commissioned him to bring order out of the chaos. Turn- 
ing seventy and approaching the end of his career, the 
gruff old warhorse was forced to take off his coat and 


again get down to the thankless business of saving the 
country. Needless to say, he made a good job of it. 
Fortunately Morgan was on better terms with George 
B. Cortelyou, then Secretary of the Treasury, than he 
was with the President, and with Roosevelt's approval, 
Cortelyou placed the resources of the government 
largely at Morgan's command. At his word its cash 
holdings were shifted from bank to bank and used 
where they would do the most good. Weak banks were 
strengthened. Sound banks were forced to help the 
weaker ones. When one of them objected that its re- 
serves were in danger of being impaired, Morgan 
roared back : "What ? Do you realize what you are say- 
ing? Tomorrow you may have no reserves at all!" 

Stillman, head of the National City Bank, threw into 
the pot the Standard Oil millions; Baker, of the First 
National, always a pillar of strength; Harriman, Mor- 
gan's ancient foe; Frick, the cool-headed, far-seeing 
head of U. S. Steel; Thomas F. Ryan, a power in many 
fields, all united behind the Grand Old Man of Wall 
Street and between them they stemmed the tide. To 
prevent an entire collapse of the market when the banks 
discontinued loans to brokers, Morgan, on a few mo- 
ments' notice, arranged a credit of $25,000,000 to be 
loaned out under his supervision. At the end of a week 
nine banks had closed their doors in New York City 
alone, Clearing House certificates had taken the place 
of currency and Wall Street was strewn with the wreck- 
age of brokerage houses and speculators but the panic 
was ended. Within a month banking in New York, and 
indeed throughout the country, was back on a normal 
basis, leaving only the dirty work of mopping up the 
back-wash of depression. Within another year business 
was "going on as usual". True, fortunes had been lost 


in the market and speculators wiped out in droves, with 
a corresponding reaction on real estate and commodity 
values. It was the Thirties on a smaller, much smaller, 
scale, for the dislocation of industry did not go far 
enough actually to halt the march of progress that was 
under way and recovery was quick. 

For the second time J. P. Morgan had come to the 
national rescue and on this occasion he got much of the 
credit that was his due. By a coincidence, his sworn an- 
tagonist, Roosevelt, played little or no part in this 
stupendous effort. He allowed Cortelyou a free hand 
and at one point, against his natural inclinations, gave 
his tacit consent to the acquisition of the Tennessee 
Coal and Iron Co. by the Steel Corporation a measure 
that became necessary to prevent the failure of one of 
the leading banking houses in the Street but aside 
from this he took no steps that affected the situation. In 
truth, he was facing forces that were greater than he 
was economic tides that rolled up and engulfed the 
puny structures that man had built and forces of human 
fear and panic which swept all before them. 

After the storm had passed, and in fact during its 
course, Roosevelt was blamed in many quarters for the 
disastrous events that occurred. To his "trust-busting" 
activities and general meddlesomeness with matters that 
were better left in the hands of Big Business, Wall 
Street ascribed the wreck. It is possible that this was 
correct, in part at least, but there were other factors 
that entered more decidedly into the situation. On the 
Cyclical Theory (whether or not there is anything to 
it) the country was due for a set-back and, on any theory 
whatsoever, a reckoning had to come. Speculation and 
over-expansion are seeds that inevitably bear the fruit 
of panics and, Roosevelt or no Roosevelt, the country 


had it coming in 1907. That the results were not more 
disastrous than they proved to be was due solely to the 
fact that the nation's resources were still unexhausted 
and its purchasing power intact to a large extent. 

Despite these facts the Panic of 1907 was not a mere 
surface disorder. It reached down deep and brought 
about fundamental changes in the financial organism. 
It is not too much to say that it marked the end of an 
era. From this point on a new sense of responsibility 
was evident, at least among the more substantial bank- 
ing interests. Among the Morgans, Kuhn-Loebs and 
other similar pillars of the industrial order there was 
less disposition to become involved in disagreements 
that led to financial dislocation. A community of interest 
came into being, with results that were highly beneficial, 
at least until the world lost its senses again during the 
halcyon days that followed the Great War and ended in 
the Depression of the Thirties. 

Burdened by his responsibilities and visibly growing 
old, Mr. Morgan took a diminishing part in the affairs 
of the Street, but once more before the end of his life 
he was to figure in the public notice. It was a full four 
years later. Business had staged a remarkable come- 
back. Happy times were here again, but the stalwarts 
who had saved the country back in 1907 were no longer 
in favor. Big Business was again under suspicion. More 
particularly the money powers, at whose head stood 
J. P. Morgan, were the objects of attack in the press 
and in Congress, where the House appointed a commit- 
tee to investigate the Concentration of Control of 
Money and Credit. Known as the Pujo Committee, 
this body conducted a series of hearings that set the 
country by the ears. Mr. Morgan himself was the chief 
witness and, under the sharp cross-examination of 


Samuel Untermyer, had an opportunity to present the 
bankers' side of a controversy which had agitated the 
country for the better part of a generation. 

As a preliminary to his examination, Untermyer 
brought out the fact that a definite community of in- 
terest existed between the Morgan firm and a group of 
financial institutions which had practically a controlling 
voice in the management of 112 great corporations, 
having aggregate resources of $22,245,000,000. Mor- 
gan objected strenuously to being placed "on exhibi- 
tion", as he called it, but on the whole made a very 
creditable impression. Among other things, he revealed 
his personal code of credit. If he did not trust a man, he 
stated bluntly, he could not get money from him "on all 
the bonds in Christendom". On the other hand, he added 
that he had known a man to come into his office and 
had given him a check for $1,000,000, when he knew 
he did not have a cent in the world. Questioned fur- 
ther, he denied that commercial credits are based upon 
the possession of money or property. "No, sir", he 
contended stoutly, "the first thing is character". It 
was in the course of this inquiry that Mr. Morgan let 
fall his widely quoted reference to "undigested securi- 
ties", a term that came to have a real meaning some 
twenty years later, when the whole country became a 
victim of this condition. 

Less than two years after Mr. Morgan's appearance 
in the Pujo investigation his body was brought back 
from Italy on a United States cruiser and the great 
financier passed from the scene of his earthly achieve- 
ments for all time. 

In the meanwhile the country had not stood still. At 
Washington Taft had succeeded Roosevelt and, in turn, 
after their much advertised falling out, had been sue- 


ceeded by Woodrow Wilson. Under the spur of an able 
Secretary of the Treasury, Wm. G. McAdoo, and with 
the aid of Senator Carter Glass, later to become Secre- 
tary, the banking system had been reorganized through 
the passage of the Federal Reserve Act. 

It is possible that this was the most constructive 
achievement of the Wilson administration but in itself 
it was not sufficient to prevent a breakdown of the 
financial and banking structure within two decades. 
That the banking system did not collapse immediately 
under the strain of the market crash of 1929 is due, 
however, to its revision at the hands of McAdoo and 
Glass. Briefly, the Federal Reserve Act linked up the 
national banks of the country, along with those State 
banks which chose to join, in a close-knit system, every 
unit of which was operated under strict government 
supervision and all of which had access to credit reserves 
in times of emergency that were likely to make it pos- 
sible to ride out any financial storm. After this, a panic 
of the sort that occurred in 1907 could not wreck the 
banking structure. In fact, nothing short of a long-con- 
tinued seepage of gold or general withdrawal of de- 
posits could bring this about. As a result of world con- 
ditions which were beyond control, this occurred at the 
end of 1 932 and early during the following year banking 
facilities were suspended by presidential proclamation 
until the situation could be taken in hand, but when the 
suspension was finally lifted the system functioned again 
and will undoubtedly continue to do so, subject to such 
modifications as recent experience may have made 

During the years of political disturbance that ended 
with the German march into Belgium, industry made 
continued headway in America. Breaking over national 


boundaries, manufacturers began to reach out for for- 
eign markets. With few exceptions every year witnessed 
a more favorable balance of trade. In the face of con- 
siderable tariff tinkering, which met w.ith little approval 
in Wall Street, exports increased from $1,743,864,000 
in 1907 to $2,465,884,000 in 1913. Toward the end of 
this period, under the shadow of the approaching storm, 
it is true that business let down to some extent. In 1913 
there was a marked decrease in both foreign and domes- 
tic trade, but it is probable that this was due rather to 
financial readjustments brought about in anticipation of 
war than to the normal effect of the Wilson policies. 
Notwithstanding this, there was ample evidence of in- 
dustrial progress. Here are just a few facts and figures 
which may be recorded as indications of the business 
trend : 

During this seven-year period commodity prices ad- 
vanced 15 per cent; bank clearings increased $10,000,- 
000,000; industrial stock averages were up 35 points, 
or 67 % , the rails 31%; savings bank deposits rose from 
$3,299,544,000 to $4,45 1,555,000, a clear gain of more 
than a billion, and the national income increased well 
over five billion dollars. 

But the outstanding phenomenon of these pre-war 
years was the emergence of the automobile, both as a 
social factor and as an economic fact. Forerunner of 
many mechanical conveniences which were to alter and 
color the outward aspects of American life, the automo- 
bile was to set the industrial pace for the greater part of 
a generation and the end of its rule is not yet in sight. 

Who invented the automobile is a question for which 
no conclusive answer has been found. Certainly it was 
not an American, although American mechanical genius 
has contributed most to its improvement and to cheap- 


ening its production. As early as 1879 Charles B. Selden, 
an American, applied for a patent on a vehicle driven 
by an internal combustion engine, but this type of power 
plant was itself the invention of a German, N. A. Otto, 
who three years earlier originated the four-cycle com- 
bustion engine, which was later to be adopted by gaso- 
line-driven machines. Likewise, the modern system of 
hot-tube ignition was the product of a German, Gottlieb 
Daimler, who also built the first motor cycle. From the 
beginning of the industry, it is to be admitted that Eu- 
rope has done much to influence automobile design, as it 
has in all style fields, but the manufacture and distribu- 
tion of this new form of transportation reached its apex 
in this country. In 1 9 1 5 Henry Ford caused much amuse- 
ment when he hazarded a guess that twenty million 
automobiles would be in use in the United States within 
twenty years. Less than fifteen years later, in 1929, total 
registrations exceeded 23,000,000. 

It was in 1892. that the first automobile appeared on 
the streets of America, being driven down Michigan 
Boulevard in Chicago, to the amazement of onlookers, 
but this was an electric vehicle. Six years later Alex- 
ander Winton delivered what was said to be the first 
American-made gasoline-driven automobile to be built 
and sold in the United States, and so started this record- 
breaking industry. After him, in quick succession, came 
Duryea, Franklin, Ford, Pierce, Haynes and Apperson, 
but up to 1905 Great Britain led the way in automobile 
production. In the meantime, however, American manu- 
facturers had been gradually developing machine meth- 
ods of production and when Henry Ford, Maxwell, Olds 
and a few other apostles of mass production got under 
way, the tide turned. By 1929 there were 26 times as 


many motor cars built and sold in the United States as 
in the entire British Empire. 

Despite the prosperity which the automobile has ex- 
perienced as a whole, its early record was not promising. 
In 1925 only fifteen manufacturing concerns which 
started in the early days were still in existence and more 
than a thousand had failed, many of them succumbing 
to the depression of the early Twenties, which caught 
automobile and truck manufacturer with heavy inven- 
tories and capital investments carried over from the 
war period. It was at this time that such well-known 
makes as Lincoln, product of the Leland Brothers 
( founders of Cadillac) , Wilco, joint creation of Walter 
B. Chrysler and John N. Willys, Locomobile, Liberty, 
Wills-St. Clair and Chalmers got into difficulties. Prior 
to this, the first important combination in the automo- 
bile field had succumbed, the U. S. Motors Corporation, 
but out of the wreck the Bradys saved Maxwell, which 
they reorganized and later consolidated with Chalmers, 
its stock becoming a football of Wall Street until they 
effected a deal with Chrysler which resulted in the trans- 
fer of their interests and banking support to the Chrys- 
ler Corporation and the final disappearance of both 
Maxwell and Chalmers as separate units. In the mean- 
time Chrysler also acquired Dodge, making the Chrysler 
Corporation the third largest organization in the in- 

Another casualty of the Twenties was William C. 
Durant, who originally put together General Motors 
and then became involved in stock market operations 
which resulted in the loss of his control to the combined 
Dupont and Morgan interests during the depressed 
market of 1920. Shrewd and not particularly scrupulous 
in his methods, Durant had built up the General Motors 


combination on a "shoestring'*, out of a conglomeration 
of concerns which were mostly verging on bankruptcy 
at the time. Just before the war period he came within 
an ace of losing control of his great property when he 
found it necessary to turn his holdings over to bankers 
in order to obtain a loan of $9,000,000. Being unable to 
meet this obligation at maturity, the bankers took over 
the management under the leadership of Lee, Higgin- 
son and Company, and placed Charles W. Nash in 
charge. Nash did such a good job that he built up the 
value of the stock to a point where Durant was able to 
readjust his banking arrangements and to put himself 
back in control. Promptly getting rid of Nash (who 
immediately formed the Nash Company, now a leading 
unit in the industry) Durant succeeded in maintaining 
his control long enough to see General Motors the 
largest and most profitable organization in the field, 
with the possible exception of Henry Ford. But in due 
course Wall Street "got" him, as it has tried, without 
success, to trap Ford since he became a factor in the 
industry. The marvel of rival manufacturers and the 
despair of bankers, Henry Ford has built up an unassail- 
able position in the industry, with assets that exceeded 
$675,000,000 at the end of 1931, even after absorbing 
losses growing out of the depression which were stag- 
gering in amount. 

Following his defeat at the hands of the Duponts, 
Durant attempted to build up a rival organization, 
Durant Motors, Inc., and in so doing organized a gigan- 
tic promotional operation that absorbed some $50,000,- 
000 of public money but in the long run got nowhere 
and recently was abandoned as a hopeless venture. But 
Durant was never able to curb his interest in the stock 
market and established a reputation as one of the great- 


est operators in the bull market that ended in 1929. At 
one time his profits were rated on paper at $60,000,000 
or more. 

From a social standpoint the automobile made over 
modern life. It tore away the bonds that held the average 
man in chains to the spot where he was born or had his 
being. Just as in a previous era the locomotive had 
broadened the scope of life, the automobile opened up 
new vistas and it reached further down into the strata 
of human life. It set a people free and put the common 
man in a way to find new beauties and larger opportuni- 
ties beyond the range of his immediate vision. As the 
cost of automobiles came down and time payment plans 
were extended, this broadening influence came within 
the reach of all classes. It became an ordinary thing to 
see the wage earner going to and from his work in a 
Ford or Chevrolet and on Sundays or holidays his family 
went with him into the countryside, where they learned, 
for the first time perhaps, that there was such a thing 
as Nature. Curiously, the machine age assumed an idyl- 
lic aspect, which added much to the wholesomeness of 

Business, too, was quickened and stimulated by this 
new economic factor. Salesmen were no longer depend- 
ent on time tables and their scope of activity was corre- 
spondingly increased. At one time it was stated that 
4,000,000 individuals found employment, directly or 
indirectly, through the production and sale of automo- 
biles, adding vastly to buying power and laying the basis 
of a broad prosperity. 

Roughly speaking, it is estimated that fifty times as 
many people as drove a horse and buggy in the old days 
came to own motor cars. The automobile was to become 
as ubiquitous as the telephone. This is a restless age. 


It demands speed and in so doing has created an industry 
that has poured billions of dollars into the till of pros- 
perity. In fact, the automobile has set a new standard 
of living. "Keeping up with the Joneses" has come to be 
determined mainly by what make of car one drives. 


INTO this scene of peace and plenty the news of the 
assassination of the Austrian archduke fell like a por- 
tent of disaster. Crashing in upon our dull, work-a-day 
world, in which only the expected seemed to occur, it 
upset our notions of the permanence of things and filled 
us with a disquieting sense of uncertainty. Not that there 
was any real alarm. We were too sure of our world for 
that. But it puzzled us. 

As the statesmen fenced and fought for delay, while 
they lit the fires of propaganda which were later to 
burst forth in a conflagration that all but consumed the 
world, we went about our tasks in the accustomed way, 
vaguely uneasy but convinced at heart that nothing 
could arise to alter the scheme of life which had been 
built up around us. Let the "Heinies" and "Frogs" fight 
it out, if they must our jobs were secure, our homes 
were safe, our boys were not to be cannon fodder; the 
old "Lizzie" would keep on running, John Bunny would 
continue to entertain us with his antics on the screen; 
Buster Brown would still caper through the funny papers 
and, best of all, business would be good. Not a bad old 
world, this pre-war, pre-Hoover one that we had built 
up. There was at least a drum-stick in every pot, though 
the rest of the bird might be lacking. 



Then the statesmen decided that it was time to start 
the bonfire. A few more bundles of brush wood. A torch 
coming out of nowhere. And the Germans were march- 
ing through Belgium, to the staccato of machine guns 
and the ceaseless rumble of artillery fire. Even then we 
were not alarmed. To the contrary, it looked like a 
chance to pick up some easy money. We had cotton and 
copper and steel, the things that shells are made of; we 
had motor cars and motor trucks and flying machines 
that would really fly, and the inventive genius to adapt 
them to the grim uses of war ; we had the wool that goes 
into uniforms and blankets and hose, the leather that 
goes into shoes and harness, and the mills to turn them 
out in million lots. We had flour and pork and beef, 
canned and uncanned; tobacco and candy all the es- 
sentials that were necessary to make a "tommy" or a 
"poilu" feel good before he was blown into atoms. And 
as the armies really swung into action, their need of 
these things and a thousand other things became urgent 
and they expressed their willingness to pay fat prices. 
They paid. Business was good. Wages went up. The 
laboring man took to wearing silk shirts. This helped 
the silk manufacturer and, rather to his surprise, his 
profits took a jump too. True, women's skirts shortened 
up a few inches and this hit the textile manufacturer, 
but he was too busy with war orders to worry about that. 
Soon all corporate profits began to swell and stocks 
moved up a peg. A peg, did we say? a couple of pegs. 
Then five, ten, twenty pegs. It was boom times again ! 
This was not such a bad war, after all. Look at Emmy 
in her new middy dress, and Emmaline in her new set of 
furs, and the new Ford out there in front of the house. 
And here's little Willy playing with his brand new toy 
cannon that just came over from Schwartz's. 


So felt that mythical person, Mr. Average American, 
as the poppies faded in Flanders field and millions gave 
up their lives to prove that statesmen were right, while 
in the forums of the world Woodrow Wilson's notes 
resounded to no practical purpose. 

In the security markets it looked as if there was 
trouble ahead when the headlines blared forth that sin- 
gle fateful word "WAR" on August 1, 1914. Promptly 
the Stock Exchange closed and remained closed for four 
months and 1 2 days. With foreign holdings of American 
securities in process of wholesale liquidation, it was to 
be expected that stock prices should take a tumble. And 
tumble they did, as an avalanche of selling struck the 
market. During the week before the closing of the Stock 
Exchange, General Motors dropped 39 points, Inter- 
national Harvester 26 points, U. S. Steel 12 points, 
Bethlehem Steel 12 points and U. S. Rubber 16 points. 

But as the war orders came in, spirits began to revive 
in Wall Street, as they did in manufacturing circles. 
Millions of rifles for Remington Arms. Millions of 
pounds of powder for Dupont. Millions of shells for 
Bethlehem Steel. Profits, these orders meant big prof- 
its. In every field business took a tremendous spurt for- 
ward. The output of pig iron jumped from 1,500,000 
tons in December, 1914 to 2,000,000 tons in the follow- 
ing December. Steel production increased from 23,513,- 
000 tons in 1914 to 42,773,000 tons in 1916. 

The U. S. Steel Corporation enlarged its plant capac- 
ity more than 40%. During 1915 the production of 
copper ran some 32,000,000 pounds ahead of any previ- 
ous year. The yield from the wheat crop increased from 
$56,710,000 in 1913 to $296,252,000 in 1916. From 
dire depression the cotton growers were lifted over-night 
into a condition of affluence. Monthly bank clearings 


jumped from $9,900,000,000 in August, 1914 to twenty 
billions in the last month of the year and twenty-seven 
billions in December, 1916. Our holdings of gold in- 
creased over a thousand million dollars. It was evident 
that the war had let loose a "boom" which exceeded 
anything in previous experience. Both wages and prices 
went up, but the balance was on the side of the wage 
earner and the national income took a leap forward as 
a result. Income taxes for 1915 showed an increase 
amounting to thirty million dollars and in 1916 another 
increase of forty-four million dollars. During the spring 
of 1917, we ourselves entered the war and for a while 
war profits continued to grow. All told, it is estimated 
that American manufacturers realized out of the war 
profits in excess of $9,000,000,000. Of this approxi- 
mately two billion dollars went back to the government 
in the form of income or excess profit taxes, leaving a 
net residue of $7,000,000,000 to compensate capital 
and industry for their joint sacrifices. No wonder that 
short-sighted industrialists prayed for war again during 
the dark days that followed the panic of 1929. 

Much has been made of the American state of unpre- 
paredness for the war and not all these strictures are 
unwarranted. Despite the fact that the greatest struggle 
of all time was going on, a struggle in which whole 
populations were involved, and, one by one, the nations 
of the world had been drawn into the vortex until a 
total of twenty-eight were represented on one side or 
the other, little had been done to fit us to do our share 
when President Wilson issued his ringing call to arms. 
In fact, the President had won his re-election on the 
plea that "He kept us out of war." The army was in 
the hands of officers of the old school, whose conception 
of warfare had been limited to the trivial operations on 


the Mexican Border. There was no Great Staff, such as 
Germany had, which was prepared to initiate vast mili- 
tary movements on the one hand and, on the other to 
co-ordinate the industrial forces that were needed to 
give them effectiveness. So burdened was our staff with 
petty duties that no one could find time even to study 
the reports of our own military observers who had been 
sent to various fronts for the purpose of reporting 
operations. Unread, they lay in the files of the War 
Department. There was practically no intelligence serv- 
ice, notwithstanding the fact that the country was known 
to be overrun with foreign spies. The purchasing of 
supplies was wholly unorganized, or, worse still, organ- 
ized along lines of the utmost inefficiency, being in the 
hands of bureaucrats who often bought for divisions of 
which they had no practical knowledge, with constant 
overlapping of functions. The conception of war as a 
conflict of populations and resources pitted against each 
other existed nowhere and, as a result, it was not until 
four months before the end that the war machine really 
began to function. Even then it was constantly thrown 
out of gear by want of balance between the fighting 
units and the industrial forces behind the lines. 

Fortunately, the Navy was more alive to the possi- 
bilities of war than were other departments of the Gov- 
ernment. Being the first line of defense, attention had 
been focussed on its condition ever since the start of 
the Great War. In fact, an active building program had 
been initiated in 1916 and this was well underway when 
the country finally entered the conflict. Out of discus- 
sion arising over Navy needs, moreover, had emerged 
the Naval Consulting Board and its Industrial Pre- 
paredness Committee, which contained the germ of the 
War Industries Board, which later came to dominate 


industrial activities in connection with the war. Under 
the leadership of Howard E. Coffin, the Committee 
completed a survey of industrial plants which became 
invaluable later and led to a general awakening among 
industrial leaders to the importance of industry in mod- 
ern war. This feeling took form later in the creation of 
the Council of National Defense, authorized by act of 
Congress, and this agency carried on the work of the 
Industrial Preparedness Committee and added greatly 
to its effectiveness. By degrees, the Council of National 
Defense ceded its powers to its own Advisory Commis- 
sion, which became the chief factor in planning the con- 
trol of industry. Operating without direct authority 
from Congress, it was nevertheless a powerful arm of 
the Government and laid the foundations of the stupen- 
dous industrial effort which was later put forth. Accused 
at the time of being a "secret government", this Com- 
mittee of seven devised the entire system of purchasing 
war supplies, planned a press censorship, designed a 
system of food control, and selected its director (Her- 
bert C. Hoover, who later became president of the 
United States), laid out a day-light-saving scheme, and 
anticipated practically every war measure that was later 
enacted by Congress, all months before Congress de- 
clared war against Germany. 

Notwithstanding this, however, the actual work of 
organizing the nation for war made no headway until 
we entered the war and it was weeks, even months, 
before results were apparent. The real power behind 
the Advisory Commission, practically from its inception, 
was Bernard M. Baruch, who later became its Chair- 
man, as well as Chairman of the vastly more powerful 
War Industries Board. Up to this time Baruch had 
achieved fame merely as a "Wall Street operator" and 


had amassed a fortune in the market, but he quickly 
developed powers of leadership which placed him at 
the head of the war effort. It is not too much to say that 
more than any other man, Baruch was responsible for 
the co-ordination of our military and industrial efforts 
when this was finally brought about. But this was not 
until the War Industries Board came into actual being 
and, in fact, had suffered several reorganizations, as a 
result of which Baruch emerged as its head. 

In organizing the country for war, it is to be admitted 
that the Government was forced to overcome an amaz- 
ing amount of inertia and inefficiency, coupled with offi- 
cial opposition and ignorance of the actual requirements 
of the situation. Merely as an instance of this, imme- 
diately upon the Declaration of War, the Advisory 
Commission recommended the appropriation of a sum 
sufficient to raise and keep an army of one million men 
in the field, but the War Department was unable to 
agree upon the amount involved or its allocation to the 
component units. The question was thrashed out before 
the Senate Appropriations Committee and when it was 
first broached the chairman of the Committee exclaimed 
in consternation: "My God! You don't intend to send 
men over there, do you?' 1 Evidently the politicians 
looked upon our Declaration of War as an empty 
gesture and our participation as a form of parade, the 
bills for which were to be footed and paid for from 
increased purchases of war materials from our manu- 
facturers. The shortsightedness of the political leaders 
knew no bounds during the early days of the war and 
it gives us pause to think of what might have been the 
result if the War Industries Board had not arrived at 
a more adequate conception of our task and the measures 
necessary to fulfill it. 


That the situation was finally met, and well met, was 
due largely to the corps of "dollar a year men" with 
which Baruch surrounded himself in the War Industries 
Board. Reaching out to the greatest industrial organiza- 
tions, he practically commandeered the services of the 
ablest executives, and it was largely on account of their 
drive and energy that results were finally obtained. 
Serving in most cases without pay and meeting their 
own expenses, thousands of these men gave their serv- 
ices without stint in a spirit of real patriotism. It is on 
record that one of these "dollar a year men" gave up a 
salary of $25,000 in order to serve the Government 
without pay. Another gave up salaries aggregating 
$85,000, with bonuses and other profits several times 
as large. 

Fundamentally speaking, the function of the War 
Industries Board was to analyze the sources of supply 
for materials needed for war purposes, to allocate 
commodities and encourage the production of those for 
which there was likely to be a lack, to direct the orderly 
flow of materials into the channels where they would 
do the most good, and to take such other action as might 
be needed to provide an adequate supply of materials. 
In a practical sense, these powers came in the long run 
to include practically all social and industrial functions, 
from establishing the hours of daylight to fixing the 
wages of labor and prices of commodities. It kept its 
hands strictly off the war machine, but its activities had 
a direct bearing on decisions in the field. 

Probably the most difficult problem of organization 
which faced the Board was the co-ordination of pur- 
chases and this was not fully solved until E. R. Stet- 
tinius, a partner in the banking firm of J. P. Morgan & 
Company, came into the War Department as surveyor 


General of Supplies. From the start a weak spot in 
purchasing had been the War Department, whose pur- 
chasing organization was lamentably involved and in- 
efficient. At first, Stettinius was brought in to uphold 
the authority of the Department as opposed to the War 
Industries Board but he quickly found a common ground 
and this contributed vastly to efficiency. 

Supplementing the activities of the War Industries 
Board, the chief agencies of the government in prose- 
cuting the war were the Railroad Administration, the 
Food Administration, the Fuel Administration, the 
Shipping Board and the War Trade Board. In the 
course of time all units developed team play to an ex- 
ceptional degree, a fact which is explained in large part 
by the high order of talent that was employed in all 
agencies. Business men of large achievement, in most 
cases, they got together on all questions and solved 
them in the interest of efficiency. 

But it is only fair to admit that much of this would 
have been impossible but for the genius of Baruch, 
whose tact, driving power and flair for getting at facts 
were in constant demand. Pursuing a fact to the last 
decimal point, his advice or decisions were seldom in 
error and he possessed a grasp of the major war prob- 
lems which was all comprehending. Industry lost a great 
executive when Wall Street claimed Baruch. Fortu- 
nately, he was beholden to no interests or set of men. 
There were no strings tied to him and the billion-dollar 
steel trust had no more standing in his eyes than an un- 
known iron foundry in New England. Moreover, he 
was accustomed to deal with large interests and to think 
in large figures and this experience had much to do with 
the results that were achieved. Negotiating with Chile 


for its entire nitrate output or with Spain for a hundred 
thousand mules were all in a day's work for him. 

Technically, the War Industries Board had no direct 
supervision over purchases, but it served as the "general 
eye of all supply departments'* and its activities in this 
direction became so valuable that from a practical stand- 
point it virtually put the final okay on all orders for 
supplies. By control of priorities it maintained a firm 
hold on the situation. For example, during the later 
stages of the war there was a great hue and cry over 
the lack of American-made shells at the front. It was 
a fact that not an American-made shell was fired during 
the war, but Baruch discovered that the French Mills 
were working only half time for lack of steel, so he 
diverted two of the biggest steel plants over here 
to the production of 75 MM. shell steel, giving them 
full priority, and within three months shell steel was 
arriving at the French Mills and it kept on rolling in 
in such quantities that reserves ultimately attained a 
total of nineteen million shells, despite the fact that 
10,000 guns were blazing away at the front. 

The question of priorities was a difficult and complex 
one. Should railroad equipment go to the front to haul 
ammunition to the fighting lines, or should it go to Chile 
to haul nitrate, which was essential to the manufacture 
of ammunition? Should nitrate go to the powder mills 
to supply the gunners with ammunition, or should it go 
to fertilizer to foster food crops, without which the 
gunners could not exist? Should steel go to the Naval 
vessels, whose function was to destroy sub-marines, or 
should it go to merchant ships, which could not leave 
port unless the sub-marines were sunk? Should cranes 
be shipped to American wharves for loading supplies 
on ships, or to French wharves for taking them off? 


Should coal go to Italy to supply power for munition 
plants, or should it be used here to supply steel for the 
same plants? Should ships be used to bring coffee from 
Brazil to feed the industrial population, or to carry 
manganese for shell steel? Should women be deprived 
of corset steel, or of tin cans for preserving foods? 
These and a thousand other questions arose constantly 
to trouble this division of the War Industries Board. 
Incidentally, it may be added that the question of corset 
steel was settled in favor of tin for canning, with the 
result that women went corsetless and have remained 
so ever since. 

As the war went on and our output of war materials 
and man power increased, it became evident that the 
neck of the bottle was transport. Men or materials, 
which were to have the right of way? The question was 
finally settled in favor of fighting men, with the result 
that 2,100,000 soldiers landed in France before the 
war ended. Consider that this was accomplished in the 
face of an original program that called for the delivery 
of less than half that number, starting with 100,000 in 
the month of July, 1918. This month's quota was an- 
ticipated by the delivery of 240,000 in the month of 
May, or two months ahead of schedule, and in the month 
of July 306,000 men were actually transported. 

In the meantime, the nation's total military establish- 
ment had been increased from 190,000 men in March, 
1917 to 3,665,000 in November, 1918. As to the ex- 
tent of the war machine's draft on industry, less than 
eight months after we entered the War, the Secretary 
of War reported that "of shoes more than 2,000,000 
pairs have already been purchased or are in the process 
of delivery, of blankets 17,000,000, of flannel shirting 
more than 33,000,000 yards, of melton cloth more than 


50,000,000 yards, of various kinds of other goods for 
shelter tents and other necessary uses more than 135,- 
000,000 yards". In addition to this the War Depart- 
ment bought 82,500 trucks, 16,000 motor cars, 27,000 
motor cycles and 2,137,025 rifles. Total purchases of 
clothing and footwear amounted to $514,000,000. 

The financing of America's participation in the War 
was a momentous undertaking and it was accomplished 
in a series of "drives" which ultimately netted some 
twenty billion dollars and, incidentally, laid the founda- 
tion for the orgy of speculation that ended with the 
crash of 1929. Under the leadership of William G. 
McAdoo, Secretary of the Treasury, the country was 
overrun with Liberty Bond salesmen, who educated the 
public up to a new concept of saving through investment. 
Under the urge of patriotic fervor, people who did not 
know the difference between a bond and plough share 
put their all into government bonds and the term "bond" 
came to connote something sacred and imbued with the 
utmost degree of safety. 

Strictly speaking, the financing of the War divided 
itself into two phases first, the Liberty Loan cam- 
paigns, which were undertaken during the actual prog- 
ress of the War, and the Victory Loan campaign, which 
was carried through in 1919, after the close of the War, 
and served as a sort of clean-up fund. The Liberty 
Loans were four in number starting with $2,000,000,- 
000 in June, 1917 and followed by $3,800,000,000 in 
November of the same year, $4,200,000 in May, 1918 
and $6,000,000,000 in October, 1918. The Victory 
Loan amounted to $4,500,000,000 and was floated five 
months after the War ended. All the issues were heavily 
over-subscribed. Pending actual flotation of the loans, 
the Treasury issued "Certificates of Indebtedness", 


short term notes bearing interest at the rate of 3% to 
3^2 %, which were promptly absorbed by the banks and 
provided interim funds to cover expenditures. The first 
war loan of 1917 carried interest at the rate of 3j^ %, 
somewhat less than the going rate for money, and was 
exempt from Federal, State and City taxes. The second 
war loan bore an interest rate of 4% , but immunity from 
taxation was limited to the basic income tax and did not 
apply to sur-taxes or war-profits and excess profits taxes. 
The third and fourth loans carried a 4*4 % rate and 
were subject to the same exemption as the second loan. 
The post-war Victory loan bore an interest rate of 
4% % None of the issues had the circulation privilege, 
which was a feature of all previous government financ- 
ing, but this did not have a deterrent effect, as the new 
Federal Reserve System had ample means of increasing 
credit without recourse to issuing currency on the basis of 
bond deposits. In organizing the drives that resulted in 
the oversubscription of these immense sums, the Treas- 
ury Department overlooked no avenue of appeal. Based 
on the twelve regional banks in the Federal Reserve 
System, Liberty Loan Committees were formed in each 
center and the work of solicitation extended out into 
the most remote hamlets. All in all, there were more 
than 50,000,000 individual subscriptions. 

That the withdrawal of such immense sums from the 
nation's capital resources should have some economic 
effect was to be expected, but the dislocation was not 
severe nor long lasting, since the funds were quickly put 
back into circulation through payments for war supplies, 
either for the benefit of the nation's military forces or 
on behalf of the Allies, whose purchases were largely 
made from our manufacturers. But the expenditure of 
these funds had a repercussion in another direction, 


which laid the seeds of future trouble. By stimulating 
our war effort to the prodigious extent that occurred, 
plant capacity was increased to a point where it far 
exceeded normal requirements and industry has not yet 
overcome the effects of this lack of adjustment. A major 
cause of the depression of the Thirties was the fact that 
the industrial establishment was geared up to produce 
more goods than a demand existed for and when a 
tightening up of credit restricted markets further, the 
entire machine was thrown out of balance. This is a 
condition that may require another decade to correct. 

Despite the great sums that were raised through the 
sale of Liberty Bonds, this was not enough in itself to 
meet the drain on the Treasury, as a considerable por- 
tion of these funds were diverted to provide for the 
needs of the Allies and accordingly it became necessary 
to supplement this financing by revenue from other 
sources. As a means of providing this additional income, 
Congress decreed a wide group of special war taxes and 
stamp taxes of many descriptions. More than four bil- 
lion dollars was provided from this source during 1918 
and the nation accustomed itself to a burden of taxation 
which has never been wholly removed. The total cost 
of the war to the United States over a period of one and 
a half years was calculated to be in excess of $32,000,- 
000,000, or approximately ten times the cost of the 
Civil War, which covered a period of four years. 

In striking contrast to previous experience, there was 
little graft in the actual prosecution of the war that 
is, graft in the usual sense of the term, such as the 
"Embalmed Beef" scandal of the Spanish-American 
War or the "Condemned Rifles" scandal of the Civil 
War but profiteering flourished on a grand scale. As 
a matter of fact it got off to a flying start during the 


period of neutrality when America was the main source 
of supply for the Allies. According to the reports of the 
Commissioner of Internal Revenue, the number of per- 
sons reporting millionaire incomes increased from 7,509 
in 1914 to 17,085 in 1916, or two and one-third times; 
the number reporting multimillionaire incomes increased 
from 174 in 1914 to 582 in 1916, or more than three 
times. How much further this access of wealth was car- 
ried during the actual war period, when profiteering 
really came into its own, is not of record but it is fair 
to assume that the great war fortunes of 1916 were in- 
creased at least two or three times over. 

Prior to our entrance into the war J. P. Morgan and 
Company acted as fiscal agents for the Allies. All told 
they handled purchases to the amount of $2,063,350,- 
000 and no whisper of suspicion has been directed 
against either their integrity or efficiency in handling 
this vast sum. In fact, their influence was exerted uni- 
formly against excessive profits but, despite this fact, 
the records show that the big corporations did not fare 
badly during these years. The actual extent of corporate 
profits during the period of neutrality was revealed in 
some detail at the time by Prof. Scott Nearing, (who 
was a socialist and hence suspect, but it may be noted 
in passing that in this instance his figures were later 
confirmed in full) . According to Nearing's analysis, the 
Republic Iron and Steel Company made an average 
profit in the three pre-war years of about $2,500,000; 
in 1916 its profits were $147,899,163. Against an aver- 
age profit of $2,000,000 per annum the American Sugar 
Refining Company made $6,000,000 in 1916; the Cen- 
tral Leather Company made $15,500,000 in 1916 
against $3,500,000 before ; the General Chemical Com- 
pany made $12,286,826 against $2,500,000; the profit 


of the Anaconda Copper Mining Company in 1916 
amounted to $57,941,834 as compared with $12,000,- 
000 before; and in 1916 the United States Steel Cor- 
poration showed a profit of $271,531,730 against an 
average profit of only $63,500,000 before the war. 
During the same period the earnings of the Bethlehem 
Steel Company jumped from an average of $3,000,000 
to $43,593,968 and those of the International Nickel 
Company rose from $4,000,000 to $73,500,000. 

Strikingly in line with the foregoing figures, the Du- 
ponts recently testified before the Senate Munitions 
Investigation Committee that the total war orders of 
the E. I. Dupont de Nemours Company amounted to 
$1,245,000,000 and that during the war years (1915 
to 1918, inclusive) the company actually paid dividends 
amounting to 458% of the original par value of its 

But, startling as these figures are, it was not until we 
entered the war that the bars were really let down and 
from that point on industry lost no opportunity to 
feather its nest. The greatest profits, of course, went to 
the munition makers, who cheerfully fell in line with the 
ancient tradition of "soaking the government" in com- 
pensation for their so-called patriotic services. Chief 
among this element were the "armament ring", (gen- 
erally understood to be the Bethlehem, Midvale and 
Carnegie steel companies) ; the shot and shell makers, 
which included the above as well as a wide scattering of 
other steel concerns ; the cannon builders, which included 
the leading units in Bethlehem and U. S. Steel; the 
rifle makers, headed by Remington (now a Dupont 
property), Winchester and Savage Arms; the powder 
makers, largely restricted to Dupont and allied inter- 
ests; the gas manufacturers, again headed by Dupont 


and including the greater part of the dye industry, and 
the aircraft builders, headed by Packard and including 
the leading automobile manufacturers. Occupying a 
place of its own was the Electric Boat Company, which 
had a virtual monopoly of sub-marine building. 

To these groups went the cream of the profits but 
other industries were not overlooked. The textile in- 
dustry, the boot and shoe industry, the packing industry, 
the ship-building industry, the automobile and motor 
truck industry all found a place at the public trough and 
waxed fat at the expense of the government. Among 
them were various groups which were not unaccustomed 
to raiding the public purse. Thus, for a generation or 
more the armament ring had been selling to the govern- 
ment armour plate for battleships at prices ranging from 
$41 1 to $604 a ton against a cost which was determined 
by the Senate Committee on Naval Affairs, in 1916, 
to be $262 per ton and was admitted by Eugene R. 
Grace, head of the Bethlehem Steel Company, not to 
exceed $315 per ton. This in the face of the fact that 
the companies had sold the same plate to Russia at 
$249 a ton, to Italy at $395 a ton and to Japan at 
$406.35 a ton. Evidently it is an accepted principle of 
Big Business, in war times at least, that one's own gov- 
ernment should be made to "pay through the nose". 

During the war, as was to be expected, steel and cop- 
per were two of the chief items of profit and it is an 
interesting fact that, in 1916 and 1917, according to 
Senate Document 259, report on "Corporate earnings 
and Government Revenues", the United States Steel 
Corporation actually put aside $888,931,000 in profits, 
or more than the total par value of its outstanding stock. 
(The same report states that profits in other fields 
ranged from 25% to 7,856%.) 


At the beginning of the war the copper industry made 
a magnificent gesture by agreeing (under pressure from 
Baruch) to accept 162/3 cents a pound for 45,110,000 
pounds of copper in the face of a market price of 35 
cents on foreign orders, although it may be noted that 
it cost only 8 to 10 cents a pound to produce copper at 
the time. Quickly recovering from this attack of gen- 
erosity, the industry raised the price to 23 YZ cents and 
ultimately exacted a price of 26 cents a pound. As a 
result the copper companies made a fairly good record 
of earnings during the war, as appears from the Con- 
gressional Committee report on "Expenditures in the 
Ordnance Department", Sixty-sixth Congress, Report 
No. 1400. 

In part the report states: "The Utah Copper Com- 
pany in 1917 made a profit of $32,000,000, which was 
200 per cent of its capital stock, and in 1918 a profit of 
$24,750,000, which was 150 per cent of its capital stock. 
The Calumet and Hecla Company in 1917 made a profit 
of $9,500,000, or 800 per cent of its capital stock, and 
in 1918 $3,500,000, or 300 per cent of its capital stock. 
The Inspiration Consolidated Copper Company in 1 9 1 7 
made a profit of $12,260,000, or 55 per cent of its capi- 
tal stock, and in 1918 $9,250,000, or 40 per cent of its 
capital stock. The Kennecot Copper Company in 1917 
made a profit of $1 1,826,000, or 70 per cent of its capi- 
tal stock and in 1918 $9,390,135.90, or 60 per cent of 
its capital stock . . . the profits here given are net." 

But despite these evidences of a willingness on the 
part of Big Business to take advantage of the govern- 
ment in its hour of need, there was little petty graft 
and government officials both in war and civilian depart- 
ments on the whole kept their hands clean. The nearest 
approach to venality grew out of the operation of cost- 


plus contracts which led to the exaction of unconscion- 
able profits, often concealed, chiefly in plant construc- 
tion, such as later came to light in the Aircraft scandals 
and Veterans' Bureau scandal, although the latter 
was a post-war development involving members of 
the Harding administration. The same applies to the 
Alien Property Custodian scandals which cost a number 
of the "good fellows" with which Wilson's successor 
surrounded himself a stretch in prison and led to the 
mysterious "suicide" of Jess Smith, who was Man 
Friday to Harding's Attorney-General, James F. 


AS THE LAST GUN was silenced on the Western 
front in November, 1918, American business looked to 
the future with mingled feelings of doubt and confi- 
dence. In all previous experience costly wars had been 
followed by prolonged periods of industrial depression 
and there were reasons to believe that history would 
repeat itself. It is true that the underlying financial 
condition of the country was sound. Widespread pros- 
perity had affected all classes of the population. Our 
gold supply had been doubled. The banks were in ample 
funds. Money was easy. In contrast, the wealth of other 
nations had been shot away. Their financial resources 
were exhausted. Their plants were dismantled. Their 
granaries empty. It appeared that it was to be America's 
task to replenish and rebuild a war-torn world, and we 
were not loath to assume the responsibility. 

But there were obvious obstacles. To begin with, 
Europe was impoverished and few nations outside the 
Continent were any better off. Credit was needed in 
large amounts. Likewise, it was necessary to recognize 
the fact that in our own country industry faced serious 
dislocation on account of the cessation of war orders, 
and the reabsorption of over four million men into the 
industrial structure offered a problem of no mean pro- 



portions. As it happened, the latter task was accom- 
plished with a minimum of friction. During the war 
female labor had been liberally utilized and this element 
was gradually forced back into its normal sphere. By the 
millions women drifted back into the home and men 
workers took their places in the ranks of industry, but 
the dislocation arising out of the withdrawal of war 
orders was more difficult to control. 

Throughout the country plant capacity had been 
stepped up to meet the anticipated war demand and the 
sudden ending of hostilities had thrown the industrial 
machine entirely out of balance. As a result, many in- 
dustrial organizations found it necessary to reduce or 
discontinue operations while they looked over the field 
and made their plans for the future. This resulted in 
unemployment, which in turn restricted purchasing 
power, and business fell into a slump in consequence. 
When prices began to fall and plants to shut down it 
looked as if the sceptics had won the day, but a sudden 
and unexpected reversal of events changed the face of 
matters completely. Through credits established by 
American banks seeking an outlet for surplus funds 
foreign buyers suddenly found themselves in a position 
to finance their purchases and the export movement was 
resumed. This change occurred in the Spring and by the 
end of the year export shipments had reached a total of 
$7,920,000,000, as compared with $6,233,000,000, in 
1918 a gain of over a billion and a half, notwithstand- 
ing the "slow" first quarter. Of course, the character of 
exports had entirely altered. In place of explosives and 
other essentials for the manufacture of munitions, 
exports of cotton and cotton manufactures increased 
$306,000,000, boots and shoes $20,000,000, wearing 
apparel $13,000,000, paper and paper products 


$29,000,000, agricultural implements and hardware 

Under the spur of these orders business soon assumed 
something like wartime proportions and the familiar 
signs of prosperity again appeared at every hand. Un- 
employment ceased. Prices went up and before the end 
of the year business was moving at a pace that caused 
some anxiety as to a shortage of materials. In fear of 
this condition, as well as of the ascending scale of prices, 
manufacturers increased their orders for raw materials. 
On the theory that orders would be filled only in part, 
they bought ahead of actual requirements thereby cre- 
ating an abnormal and artificial demand. This, in turn, 
forced prices up again and by the end of the year wheat 
was selling at $3.50 a bushel, cotton at 48^4 cents a 
pound, higher than either had sold in war times. Between 
January and September, 1919 the price of sugar in- 
creased 33%, the price of wool 25%. Shortly after the 
close of the war the government price index, based on 
478 commodities stood at 247, as compared with 214 
during the war and 173 during the period of neutrality. 

Curiously, advancing prices were accompanied by a 
veritable orgy of spending, which extended down into 
the lowest strata of the population. It was as if lifting 
the tension of war had sent the whole country off on a 
buying spree that knew no bounds. In order to keep pace 
with demand merchants increased their orders and 
manufacturers protected themselves by advance orders 
that were often several times actual requirements. De- 
liveries were allocated on a percentage basis. There was 
widespread speculation both in stocks and in commodi- 
ties. Over-extension was universal and the banks were 
carrying the burden. Total rediscounts of the Federal 
Reserve System increased from $1,797,800,000 at the 


end of the war to $2,189,400,000 in November, 1919. 

By maintaining a low rediscount rate to which the 
government was committed by war-time pledges to carry 
loans on Liberty Bonds at a nominal interest rate 
cheap money was rendered available for speculation 
and ample advantage was taken of this fact. But, as this 
situation came to a head, it brought about its own un- 
doing. Trouble started with British exchange, which 
took a turn that resulted in heavy withdrawals of gold, 
almost half a billion dollars being shipped out for for- 
eign account. This resulted in a tightening up of bank- 
ing credit and borrowers began to feel the pinch. On 
top of this, early in November, the New York Federal 
Reserve Bank announced an increase in the rediscount 
rate and a near-panic occurred in the stock market. In 
the course of a week or two industrial stocks declined 
from 60 to 125 points and there was widespread concern 
about the general outlook. 

In the face of these developments the banks drew in 
their horns still further and Europe began to find it 
increasingly difficult to secure credit. Up to the end of 
the year the banks had advanced some two billion dol- 
lars on foreign letters of credit. These credits were 
taken up largely out of the post-war advances which the 
Treasury had authorized, but when this reservoir was 
exhausted no further resources were in sight and Euro- 
pean buying power was at an end, for the time being at 
least. Naturally this was reflected in an immediate let- 
down in orders, but export business still continued at a 
rapid rate with South America and the Orient, chiefly 
Japan, which bought heavily of cotton goods, copper, 
and machinery and sold us silk in return. In these parts 
of the world a similar outburst of prosperity had oc- 
curred and the same buying waves were under way. 


Inflation was no less rampant than in America and the 
bubble burst first in Japan, where a stock market panic 
occurred in March, 1920, followed by a rapid drop in 
commodity prices, leaving our banks hung up with mil- 
lions of pounds of raw silk which they were carrying for 
American importers at top prices. The Argentine had 
been a heavy buyer of manufactured goods and likewise 
experienced a sudden deflation during the Summer which 
resulted in the cancellation of millions of dollars of 
orders. At this end the manufacturers had discounted 
their drafts covering many of these shipments which 
were on the way and again the banks found themselves 
in a predicament. This experience was repeated in va- 
rious countries, where panic and depression seemed to 
be cropping out like a universal form of measles, and it 
was not long before our banks were loaded up with 
"frozen credits" and our few remaining export markets 
were closed. 

In the meantime rising prices had set the stage for a 
peculiar phenomenon which affected our buying popula- 
tion. From a race of spendthrifts we suddenly became 
a race of misers, as a "Buyers' Strike" spread through- 
out the land. Rapidly assuming the form of an organized 
movement, consumers everywhere banded together and 
pledged themselves to make no purchases until prices 
came down. Old clothes were taken down from the attic 
and made over. Discarded shoes were patched up and 
worn. "Overall Clubs", "Old Clothes Clubs" and simi- 
lar associations sprang up on every hand. In New York 
City an "Economy Parade" marshalled thousands in 
its ranks. In the aggregate this movement had a telling 
effect and goods backed up on the merchants 7 shelves to 
an extent that gave them much to worry about. 

As has been the case in all major depressions, the 


crisis reached its worst in the Autumn, when as a rule 
the trade position is put to a severe test and credit is 
most in demand. Swamped by foreign commitments and 
facing depleted reserves, the banks were forced to bring 
about liquidation on a large scale. Hoarded merchandise 
was dumped on the market without regard to values and 
prices crumbled to little or nothing. Within the space 
of six months wool prices fell from 66 cents a pound to 
less than 40, rubber from 39 to 19, copper from 171/8 
to 6 1/8, sugar from 21 to 8, in some cases establishing 
all-time lows. This occasioned similar liquidation on for- 
eign markets and the scarcity of funds practically ended 
the sale of our manufactured goods abroad, where ware- 
houses and even sidewalks were piled high with our 
products, while "frozen credits" in our banks attained 
unprecedented proportions. 

Fortunately the elastic new Federal Reserve System 
was equal to the strain and there were few casualties 
among the banks. Unlike other similar depressions, the 
crisis of the early Twenties was not a bankers' or stock 
market panic. There were no runs on banks, no failures 
of important banking or brokerage houses. True, there 
were two severe "breaks" in the market the first 
toward the end of 1919, when the first signs of the turn 
in the business cycle appeared, and again in the Spring of 
1920, when stocks entered upon a prolonged period of 
decline which carried speculative issues from fifty to 
sixty per cent below the lows of 1919, but this was the 
effect of liquidation rather than a contributing cause. 

Essentially it is evident in the light of present knowl- 
edge that the condition in which the country found itself 
during these trying times was due to widespread over- 
extension, growing out of an undue inflation of banking 
credit which lifted prices to artificial levels. This led 


straight back to the government's policy of keeping the 
Federal Reserve rediscount rate down to the level of the 
Liberty Loan interest rate, thereby unloosing a vast 
flood of cheap money for the benefit of speculators. 
Yielding to the temptation afforded by this easy money, 
many manufacturers likewise were induced to inflate 
their inventories beyond the danger point and when de- 
flation set in it had a severe repercussion on industry. 
Unable to liquidate their inventories and so to meet bank 
loans, manufacturers were forced into receivership and 
reorganizations were the order of the day. During 1920 
and 1921 there was an increase of 73 per cent in com- 
mercial failures over the previous two years. 

To add to the burdens of the depression, the govern- 
ment's guaranty of wheat prices expired in the middle 
of 1920, just when the crisis was at its height. The price 
of the 1919 crop had been fixed by congressional action 
at $2.20 per bushel. For a while speculation held the 
price up and, in fact, as late as June, wheat was selling 
at $3.13, but from that point it declined steadily, break- 
ing $2 in October, and a year later, in November, 1921, 
selling down to $ 1 .00 >^ . The prices of other agricultural 
products declined in sympathy with wheat and the far- 
mer entered upon a long spell of "hard times", the end 
of which is not yet in sight. Responding to the urgent 
call of the Hoover-controlled Food Administration dur- 
ing the war, farmers had increased their acreage ex- 
tensively, in most cases mortgaging their total holdings 
in order to cover additional land purchases. Within a 
period of ten years farm values had risen some 200 per 
cent and these values formed the basis for new borrow- 
ings. When farm prices dropped, naturally land values 
also declined and the banks found themselves loaded 
up with mortgages of doubtful value. Foreclosures were 


general and the farming community as a whole suffered 
a devastating loss. But this is the lesson of all depres- 
sions. Deflation carries a trail of grief that is written 
in blasted hopes and wrecked fortunes. 

How the banks stood up under the combined drain 
upon them during these arduous times it is difficult to 
understand, particularly in the light of events of the 
early Thirties, when the banking system collapsed under 
the strain of liquidation; but it is impossible to escape 
the conclusion that during this time the direction of the 
system was in safer hands than it later fell into. Not- 
withstanding this, there was a fatal weakness in the 
Federal Reserve policy during this period, for which, 
however, the government was responsible rather than 
the Reserve officials. Having committed the System to 
a policy of carrying loans on Liberty Bond subscriptions 
at the bond rate, it followed that the banks in turn were 
enabled to rediscount such loans at the going rate of 
4% to 4 J4 % and then turn around and lend the proceeds 
to other borrowers at the commercial rate of 5% or 
6%. Obviously this was a profitable procedure from the 
banks' standpoint and they took full advantage of their 
opportunity during the "flush" period, playing into the 
hands of speculators who found it possible to secure 
ample funds for their purposes. Ordinarily the increas- 
ing demand for money would have been reflected in 
higher rates, but this natural process was set at naught 
by the low rediscount rate which the Reserve authorities 
maintained at the dictation of the government. In con- 
sequence national bank loans increased more than $2,- 
000,000,000 during the last ten months of 1 9 1 9 and this 
expansion of bank credit was directly responsible for 
increasing prices and the artificial wave of prosperity 
which followed in their wake. But this situation brought 


its own corrective. As soon as the Federal Reserve pol- 
icy was changed and the rediscount rate raised, the banks 
were no longer in a position to turn over their Liberty 
Bond loans at a profit and so were forced to call for 
payment. In the ensuing liquidation the price of Liberty 
Loan 4^ 's dropped to 82, even the Victory Loan4j4's, 
maturing only three years later, sold at 5 points below 

Taken as a whole, the period of wild prosperity that 
followed the war might properly be called the Era of 
the Great Illusion. The sudden improvement in business 
originated in an abnormal and temporary export de- 
mand, which was bound to cease as soon as credit was 
exhausted. In its turn, this unexpected wave of pros- 
perity brought about a domestic demand which added 
to the illusion and induced speculation on a vast scale; 
but this, like the overnight export demand, rested on a 
foundation of "cheap money". As soon as the credit 
prop was withdrawn, the whole structure fell to the 
ground, like a house of cards, and the country was 
steeped in depression. 

Such was the course of the post-war depression, and 
in its essentials it was not vastly different from other 
financial disturbances of similar scope and intensity. 



AS PRESIDENT WILSON limped out of the White 
House, broken in spirit and body, and the new President, 
Warren G. Harding, took his place with a dignity un- 
marred by his affability, an unmistakable sigh of relief 
went up throughout the nation. For four long years the 
American people had been on a spiritual jag. Their 
emotions aroused by the first gun that boomed over 
Flanders Field, there had been no let-down. In long 
succession they had thrilled to stories of heroism and 
martyrdom, to appeals for aid and sympathy, to pledges 
of sacrifice and self-denial, and the Weltschmer-z lay 
heavy on their souls. They were weary. They were ready 
for a rest. Reaction was overdue. 

In a more practical sense, business yearned for the 
old order. It had its eyes on the good old days when you 
could get what you wanted in Washington if you knew 
the "right people". No less than the commercial minded, 
the Wall Street fraternity was sick of war and its 
alarums. Markets are not safe to fool with in times 
when a powder barrel is always likely to explode some- 
where and close the exchanges, leaving their devotees 
hung up with a line that may be 20 points off at the re- 
opening. No more of these foreign entanglements, said 
both western senators and the eastern business interests. 



"Back to normalcy", said Mr. Harding, using a word 
that appeared in no dictionary. 

And normalcy, or normality, to employ the word in 
its correct form, was just what the people wanted. It was 
for this that they elected Harding, and with certain 
variations and excrescences, they got what they wanted. 
From the first, his appointments those at least that 
the public heard about inspired confidence in a return 
to sound principles. Charles E. Hughes who had lost 
a lot of his early liberalism through contact with Wall 
Street as Secretary of State. Andrew W. Mellon 
who had never been suspected of entertaining a liberal 
principle in all his life as Secretary of the Treasury. It 
was almost like the good old times when Mark Hanna 
ran the show. Quickly the President got Congress to 
pass a bill putting the government's affairs on a unified 
budget basis. (The business interests liked that). Peace 
was made with Germany. A satisfactory agreement for 
refunding the British war debt was concluded. Not a 
final one, it may be added in passing. And soon the 
Arms parley got under way, promising to advance the 
cause of peace and to open up foreign markets to our 

In the meantime the depression had lessened in sever- 
ity. Under the leadership of Henry Ford, business had 
been induced to ignore the advice of the banking element 
to "deflate labor" and wage levels had been maintained, 
with the result that as industry quickened its pace the 
home market expanded. The urge for travel by motor 
car likewise had not been lessened by the brief let-down 
in business and the automobile industry led the forces 
of recovery. In 1922, 2,659,064 motor vehicles were 
built and sold, as compared with 1,589,323 in 1921. The 
next year 3,837,706 cars were put on the road. In 1921, 


for the first time, the radio made its appearance as a 
social and economic factor when President Harding's 
inaugural address was broadcast over a nationwide 
hook-up. The following year sales of radios and their 
accessories exceeded $60,000,000. In 1923 this was 
more than doubled, blazing the way for an industry that 
reached a sales peak of $842,548,000 only six years 

During these early years of the Twenties we note the 
birth of another factor which entered largely into the 
pseudo-prosperity that swept the country later during 
this decade installment selling. Beginning with auto- 
mobile financing, this new form of credit was gradually 
extended until it covered radios and other musical in- 
struments, refrigerating systems and household elec- 
trical devices, plumbing, dental and medical services; 
even vacation tours and funerals were finally included 
in this universal form of borrowing against the future. 
If need be, one could be brought into the world and pass 
out of it on a monthly payment basis. 

Along with the expansion of business and earnings 
that set in with the Reign of Normalcy, came an im- 
provement in markets and the public imagination be- 
came inflamed at the possibilities of future profits. Dur- 
ing the Liberty Loan drives of wartimes the man in the 
street had become thoroughly educated up to the me- 
chanics of investing and this process now operated to 
bring about his undoing. The ubiquitous stock salesman 
developed a new and ingenious technique and promo- 
tions by the thousands were foisted on an avid public. 
High pressure security men set up schools for training 
hordes of salesmen and it was not uncommon to find 
a thousand or more men working in a single organiza- 
tion. Proceeding on the theory that any salesman, how- 


ever inept, could produce at least a few sales, even if, 
as a last resort, he had to turn to his family connections, 
these organizations went out into the highways and 
byways and picked up men of every description who, in 
turn, unearthed vast sums for investment, much of which 
got no further than the promoter's pocket. Following 
on their heels came the "reloader" and the "dynamiter", 
who developed to the nth degree the art of inducing ill- 
advised investors to throw good money after bad. The 
last penny of the widow and orphan often went into their 
insatiable maw, until finally there developed a well- 
defined public sentiment against this conscienceless form 
of greed. This resulted in the establishment of Better 
Business Bureaus in all communities of importance, 
which made it their special business to protect the in- 
vestor, as well as other buyers, from unsound and f radu- 
lent schemes. "Before you invest, investigate" was their 
slogan but unfortunately since time immemorial the 
public has done its investigating after it paid its money, 
and therefore these well-meant efforts were not always 
productive of good. All told, it is estimated that more 
than a billion dollars a year was sunk by the gullible pub- 
lic in unsound or crooked stock selling schemes, and this 
takes no account of equally fraudulent schemes that 
were put out under the protecting wing of Wall Street or 
the various stock exchanges throughout the country. 
This, too, was one of the results which the beneficent 
Reign of Normalcy led us into. 

One of the most persistent offenders against the in- 
vesting public was the notorious George Graham Rice, 
whose "come-on" or tipster sheet, the Wall Street Icon- 
oclast, was the means of building up an enormous traffic 
in securities of doubtful value. Following a sojourn in 
the sombre institution whose gray walls overlook the 


Hudson at Ossining, New York, (Sing Sing Prison), 
Rice turned up again in the very heart of Wall Street, 
where he continued to ply his trade until he fell foul of 
the Postal authorities, who duly sent him to Atlanta. 

Somewhat less ingenious but no less disastrous to 
gullible investors were the operations of the plausible 
and simple-minded Ponzi, who took some millions of 
dollars away from tight-fisted New Englanders on the 
plea that he would pay them 50% return on their money 
which he did, by constantly passing out new capital 
for this purpose until the authorities finally caught up 
with him and, like Rice, sent him into quarters where 
he was no longer a menace to investors. 

A phenomenon of these years of normalcy which 
indicates how abnormal in reality they were was the 
land speculation craze that reached its climax in the 
Florida boom. 

Starting nowhere in particular and gathering momen- 
tum as it took form, this development was a curious 
intermixture of the loose code of business ethics that 
prevailed during the early Twenties and the speculative 
mania that culminated in the crash of 1929. Fostered 
by blatant propaganda and enraptured rhetorical out- 
bursts that presented the advantages of the Florida 
scene and climate in no uncertain terms, it enlisted the 
efforts of a horde of operators of doubtful antecedents 
and intrigued the interest of a vast section of the popu- 
lace. From bootblacks to bankers the public bought lots 
in mythical "developments", often while they were 
still under water or wholly undeveloped. As a rule, 
buyers paid only a small deposit, or "binder", and never 
expected to be called upon for additional payments, as 
they counted on turning over the property at a profit 
before further payments fell due. Generally the binder 


itself represented more than the original cost of the 
property, so that the operator was u on velvet" from 
the start. Land that cost $25 or $50 an acre sold for 
$500 or $1,000 a lot and, strange as it seems, during the 
height of the boom at least, the purchaser often realized 
a profit on such transactions. 

In point of fact the boom throve on tales of easy 
money made in this way. On the ground in Miami or 
Palm Beach or St. Petersburg or a hundred other cen- 
ters one heard countless tales of fortunes made in this 
form of speculation. According to these epics, a widow 
who had picked up a piece of land for the nominal sum 
of $25 some years before sold it for more than $100,000 
in 1925. A tract in the business section of Miami which 
had been worth less than $250,000 before the boom 
was broken up into lots and sold for a million and a half. 
A single lot in the same section was bought for $800 
during the early stages of the boom and sold for $150,- 
000 two or three years later. 

Under the spell of such tales the public rushed in and 
eagerly bid for lots that often existed only in blue-print 
form or in the imagination of the developer. Cities 
sprang up over night and the population of jerkwater 
towns increased five or ten times over. Entire sub-divi- 
sions were sold out in a single day, the transactions 
often running into millions of dollars. Prices reached 
prodigious heights. $5,000 to $10,000 for inside lots. 
$25,000 to $75,000 for waterfront or seashore lots. 
Price was a secondary consideration when you paid 
down only a ten-per-cent binder and took a hundred- 
per-cent profit before the next payment was due. 

It all seemed so easy ! And so it was until the boom 
began to fade. Then things happened. Those who held 
binders found it increasingly difficult to unload their 


"bargains" on equally gullible buyers. They began to 
default on their payments and the property came back 
on the previous purchasers often loaded with taxes and 
assessments. Development ceased and the rosy promises 
which had been glibly made by high pressure salesmen 
vanished into thin air. The land was filled with half- 
finished or barely-started developments and the skele- 
tons of unfinished skyscrapers dotted the landscape. 

Then came the hurricanes two in rapid succession 
which blotted out much that the hand of man had 
wrought and left the Gold Coast of Florida looking like 
a plugged nickel. Gone now were the "easy-money" 
boys, the hosts of land salesmen, the hordes of not-too- 
inquisitive buyers. Deserted the palaces of the "get-rich- 
quick", the esplanades and waterways that graced the 
dream cities of the Florida littoral. Broke the gullible 
many who had tossed their money into the whirlpool 
of speculation. 

But, as the land craze subsided, there was still a 
chance for those who sought a quick and easy road to 
riches. For the Coolidge Bull Market was just getting 
under way. 

It was during this period of free and easy money, 
when the Apostles of Normalcy exercised their benign 
influence, that the nationwide effort to transfer the peo- 
ple's savings into bond investments, good, bad and in- 
different, took form. During the war the term "bond" 
had acquired a sacrosanct meaning. Symbol of patriot- 
ism and sacrifice for the nation's good, it was also 
established in the public mind as another word for 
Safety. If government bonds were safe, why not other 
bonds? If bonds that paid 4j4% were good, why not 
bonds that paid 1% or 8%? After all, a bond was a 


Sensing this state of mind and coveting the profits 
accruing to investment houses that took advantage of it, 
the big banks began to cast about for some means of 
taking a hand in the business. Obviously this was not a 
banking function, for, strictly speaking, it is the function 
of the banker to stand between the depositor and pro- 
moter. Likewise it was opposed to the banker's interests 
in a sense, since every bond sold to his customers re- 
duced his deposits by so much; but, he reasoned, if 
others were going to make inroads on his resources, why 
not get some of the gravy? Certainly there was profit 
in it. As a concession to ancient prejudices, however, he 
took pains to keep his skirts clean, at least so far as the 
record went, and decided to set up a separate organiza- 
tion for the purpose of carrying out his questionable 
program. And so the Security Affiliate was born. 

Financed by the bank, its underwritings carried by 
the bank and generally officered by the bank, this in- 
genious piece of mechanism was the bank's alter ego, 
its Siamese twin, and in many cases it came near to be- 
ing the dominant member of the partnership. Thus, the 
National City Company contributed to the treasury of 
the National City Bank profits that were sufficient in 
themselves to pay the bank's entire dividend during 
1928 and 1929. In some instances these affiliates were 
owned outright by the bank; in others they were sister 
enterprises and were financed separately by the bank's 
stockholders, but from the operating standpoint, to all 
intents and purposes, they were an integral part of the 

Starting timidly, with every evidence of caution and 
conservatism, these institutions gradually expanded the 
scope of their operations until the larger organizations 
maintained branches at every important center. Supple- 


menting their own organizations were syndicate connec- 
tions which offered an outlet for securities on a vast 
scale. As their distributing facilities increased, they 
developed a corresponding need for salable securities 
or merchandise so that the affiliates became in- 
volved in extensive underwritings. Not all of these 
underwritings were disinterested. In many cases they 
were situations where the banks had to be "bailed out". 

During the sad days of 1920 and 1921 the banks had 
been forced into many lines of business which were for- 
eign to their regular experience. By reason of frozen 
loans to sugar interests the Guaranty Trust Company 
and National City Bank had come to acquire a command- 
ing position in the sugar industry of Cuba. They held 
the bag for sugar mills and plantations without number. 
Likewise the Bankers' Trust Company, The Chatham 
and Phoenix Bank and Trust Company, and Irving 
Trust Company and a group of other banks, numbering 
about thirty all told, were deeply interested in the silk 
business, as they had loaned a considerable number of 
millions on silk at $20 per pound which afterwards 
dropped to $5 per pound. From Boston to San Francisco 
this condition applied and the banks of larger standing 
lost no time in cleaning up their "bad" loans through 
bond and preferred stock issues, which were eagerly 
taken off their hands by an unsuspecting public. It was 
the Security Affiliates largely that made this possible. 

But in itself this was not enough to keep the affiliates 
going. They had big overheads and Old Man Overhead 
had to be satisfied. Moreover, as inflation took form, 
public acceptance seemed to be boundless and more and 
more securities had to be ground out to provide for the 
needs of their own selling organizations. It was a vicious 
circle. By adopting the chain-store principle of mer- 


chandising they developed a demand which required 
mass production to satisfy and this, in turn, created a 
supply which called for constantly increasing selling 
efforts. Industry was scoured for possible financing and 
competition was responsible for deals which were set 
up on an unsound, uneconomic basis. The affiliates be- 
came veritable security factories. 

From the banking standpoint, the banks ceased to 
function as banks insofar as the operations of their 
security affiliates went. Accepted banking principles 
were tossed out of the window. They were merchandis- 
ing organizations, pure and simple, and high-pressure 
methods quickly found their way into the "Holy of 
holies". Bond salesmen were everywhere. If a college 
boy established an athletic reputation, or otherwise 
made the right connections during his academic career, 
he was immediately snapped up by these organizations 
and after a two or three weeks' period of intensive 
schooling, was set up as an adviser to the investing 
public. Then, after being duly impressed with the impor- 
tance and standing of the organization to which he 
belonged and sanctimoniously exhorted to avoid high- 
pressure methods, he was promptly given a quota which 
could only be met by the liberal use of dynamite in sell- 
ing. As an example of the pressure that was applied to 
the personnel of these organizations, consider the fol- 
lowing extracts from a "pep" letter that was actually 
sent out by the security affiliate of a leading Wall Street 
bank, which boasted of the fact that a member of Wash- 
ington's cabinet had been one of its founders. The letter 
is addressed to a branch office manager.* 

"I should hate to think that there is any man in our 

* See Scapegoats, by Julian Sherrod, 


SALES CROWD who would confess to his inability to 
sell at least some of any issue of either bonds or pre- 
ferred stock that we think good enough to offer. In 
fact, this would be an impossible situation and, in the 
interest of all concerned, one which we could not permit 
to continue.**** 

"We sent a long flash (wire) this week on specific 
issues, including Cuban Dominican Sugar bonds and 
Willys Overland Preferred Stock. 

"I have before me an analysis of individual sales on 
the issues'included in the special premium (commission) 
arrangement. * * * * 

u Mr. A's sales have been $29,700 of these. We are 
very confident that he can give us better results on these 

u Mr. B has not responded on these special issues 
since we asked for particular attention to them and, in 
fact, of Willys Overland Preferred Stock has sold only 
$1,000 and of the Cuban Dominican Sugar none. He 
can sell these and we ask for his immediate support. 

"Please give this question of the character and value 
of the work being done by the men in your office your 
most thorough study and be sure that each man is 
have your comments on the men in your office at your 

convenience.' 7 

It was such "pep" letters and "pep" talks better 
suited to the merchandising of typewriters or cash 
registers than to so-called investments coupled with 
"puff" bulletins, newspaper propaganda and highly- 
colored statistical reports, that sent sales sky-rocketing 
and buoyed up the spirits of investors to a point where 
they lost all sense of balance. 

Under these conditions it was no trick, of course, for 


the security affiliates of the larger institutions to build 
up phenomenal sales records. Having access to the 
bank's list of depositors, they made a practise of seeking 
out those who maintained substantial balances and see- 
ing that they were duly converted into the securities 
which the affiliate carried on its shelves and often served 
to clean up "bad loans" on the bank's books. Going a 
step further, the bank extended liberal credit to such 
customers and in this way laid the foundation for the 
frozen condition of bank loans that came to light when 
the market broke. Generally such securities were bought 
by the bank's customers solely on the strength of their 
faith in the bank, but this consideration had little weight 
when the bank found it necessary to "call" these loans 
as the tide of declining values set in. Quickly the erst- 
while customer found that he was a customer no longer ; 
he was a debtor. His bank had played him false. 

To the operations of these security affiliates and in- 
dependent investment houses that adopted the chain- 
store system of security distribution may be traced 
much of the financial grief that was later translated into 
the depression of the Thirties. Combined with real 
estate bond offerings, which were distributed to the 
public by the same conscienceless methods and with 
even less regard for actual values, often backed up by 
the dubious guaranties of insurance companies, they 
were chiefly responsible for the tremendous volume of 
liquidation that has had to be absorbed before recovery 
came into sight. 

True it is that the fruits of the Reign of Normalcy 
did not become apparent until long years after the 
Harding regime ended with the mysterious death of the 
lovable president, but that the seeds were sown under 
his benign eye cannot be gainsaid. It was for another 
day to reap the whirlwind. 


UP TO THE END of the war period speculation in the 
stock market had been confined largely to professional 
traders, who were wise in the ways of the Street and 
pitted their wits against opponents of equal acumen, but 
the war created a whole new race of speculators. To 
profiteers of many breeds wealth had come easily and 
they were willing to risk their gains. It was this element 
that was largely responsible for the market of 1919, 
when three-million-share days found their way into the 
financial news for the second time only since 1901, when 
the first of such days was recorded in the wild market 
that grew out of the corner in Northern Pacific. 

As transactions on the New York Stock Exchange 
attained volume after the war, traders throughout the 
country began to take an interest, but the "smart money" 
was not deceived. To this class the bulge in stock prices 
merely signalized the post-war inflation, which was 
destined to precede the grand smash-up of values that 
was inevitably to follow on the waste of wealth caused 
by the war. If they took a hand at all, it was merely for 
a "quick turn", and it was soon demonstrated that they 
were right, for the market ran its course in the short 
space of twelve months and left behind it the usual 
trail of grief. 



To the neophyte Wall Street has always offered a 
ready means of getting rid of "easy money" and it lived 
up to its reputation in 1919, but the eagerness with 
which a war-worn people sought the relief from nervous 
tension afforded by speculation served only to open the 
eyes of bankers and brokers to the real possibilities. If 
three-million-share days were possible, why not five- 
million-share days, or even ten-million-share days? All 
that was needed was to pump a little oxygen into the 
structure. It is true that the lesson of the post-war de- 
pression was to be drastic, but, after all, there are other 
times and other lambs to be shorn. 

"A broker is a low wretch, given to dealing in shares," 
said Dr. Samuel Johnson, and in this instance the 
u wretch" in question accepted his commissions grate- 
fully and bided his time, while the stage was being set 
for the big "killing". It was not long delayed. Industrial 
recovery followed fast on the heels of depression and by 
1923 business was "going on as usual". During the 
earlier stages of this process of readjustment the per- 
formance of the market was not phenomenal. Traders 
had had a lesson but they could not resist the lure of 
the approaching wave of prosperity, which in due time 
was to be translated into terms of the "Coolidge Bull 
Market", and during the latter part of 1923 stocks 
began to move up. It was heartening. From October, 
1923, to January, 1925, the Dow-Jones averages ad- 
vanced 21 points, or approximately 25%. Transactions 
on the New York Stock Exchange increased in volume 
from less than one million shares a day to a peak of 
3,349,000 shares in November, 1925. During the latter 
part of 1923, and again in November, 1925, there were 
set-backs not serious ones, but enough to drop the 
averages 15 points, all told. At the lower levels accumu- 


lation set in and it was not long before the Big Bull 
Market was in full swing. 

During all this period business was expanding in 
many directions. From year to year corporate profits 
as a whole increased at an average rate of nine per cent. 
Fed by the growing automobile industry and its allied 
lines which occupied four million people all told 
employment was increasing and wages were good. It is 
true that, according to the National Bureau of Econom- 
ics, this incipient prosperity was restricted to the Mid- 
dle Atlantic, Eastern, North Central and Pacific states, 
and everywhere agriculture was a sore spot. But, why 
bother about that? agreed the broker and his customer 
alike. The farmer is a chronic sorehead. Likewise, the 
general average of commodity prices strangely failed 
to follow the market. Contrary to all precedent, the 
level was held practically on a line on the charts until 
close to the end of the "boom" period, when it took a 
sudden and suspicious drop. But to those who were not 
disposed to look too closely good times were here again 
and the future appeared rosy. 

As the outlook for business improved and the move- 
ment in stock prices developed, it soon became evident 
that a new element was behind the market. There was a 
new leadership in industry and this leadership was not 
averse to backing its judgment with market support. 
New stocks began to take the lead on the "Big Board" 
and each had its sponsors and followers. Where in the 
old days the rails and a few outside stocks, such as U. 
S. Steel and Consolidated Gas, had set the pace, other 
issues now came to the fore. In ever-increasing volume 
new symbols appeared on the ticker ATT, GM, AC, 
AAC, GE, WX, Z American Telephone, General 
Motors, American Can, Case Threshing Machine, Gen- 


eral Electric, Westinghouse, Woolworth, later to be 
supplemented by Radio, "Monkey-Ward," Columbia 
Graph, Dupont, Chrysler, Auburn, United Aircraft and 
a host of other speculative favorites. Back of these 
stocks were a group of industrialists who had both 
courage and convictions. The American Can crowd, the 
Dupont crowd, the General Motors crowd, including 
such names as Harbeck, Baruch, Raskob and, as time 
passed, the Fisher brothers, Cutten, Matt Brush, Du- 
rant, Percy Rockefeller and Danforth. Little favored 
in earlier days, the public utilities began to take the spot- 
light. Columbia Gas and Electric, Pacific Gas, Standard 
Gas, Brooklyn Union. Came the big utility holding com- 
panies Electric Bond and Share, American and For- 
eign Power, North American, Central States Electric, 
Niagara-Hudson, United Gas Improvement, Com- 
monwealth-Southern and United Corporation. The 
names of Bonbright, Byllesby, Sidney Z. Mitchell and 
Harrison Williams shot up into prominence. On the 
Exchange itself Jesse Livermore, (twice bankrupt and 
to be bankrupted again) , Mike Meehan, Ben Smith and 
Tom Bragg became names to conjure with. Information 
that could be run back to these sources was accepted as 
"triple A". 

Broadly speaking, the Big Bull Market of the Twen- 
ties passed through three stages. The first, starting in 
1923 and ending with a sharp reaction during the latter 
part of 1926, merely laid a foundation. The real mar- 
ket, or secondary stage, got under way immediately 
thereafter and reached its climax at the end of 1928, 
when a drastic shake-down in values provided a basis 
for a final advance. This started in January and carried 
the averages up perpendicularly until the middle of the 
year, when a series of reactions gave warning of ap- 


preaching trouble. After this, little headway was made 
before the crash came in October, when within the space 
of two weeks the averages lost most of the gains regis- 
tered over the preceding two years. It is with the first 
stage that we are mainly concerned in this chapter. 

During this period the market was more nearly 
normal than it ever appeared again during the succeed- 
ing years. Preceding this there had been a sharp upward 
movement in prices, occurring chiefly during 1922, 
which carried the averages up about 40 points and sig- 
nalized the end of the panic of 1920-1921. This was 
followed by a reaction of 20 points, which provided a 
bottom on which the structure of the Big Bull Market 
was to rest. From this point on there were few reces- 
sions of more than minor importance and these merely 
afforded an opportunity for accumulation. It was not 
until the end of 1926 that the Federal Reserve policy of 
maintaining cheap money rates became apparent and 
then the signal seemed to be passed along the line that 
all was clear ahead. But not all gave heed. Many wise 
and experienced traders had become frightened by the 
action of the market during 1925 and, deciding that the 
end was near at hand, had withdrawn, thereby shutting 
themselves out of the big profits that were taken during 
the next two or three years. By a curious twist of fate, 
these same wiseacres jumped back into the market im- 
mediately after the "big break" in 1929 and took losses 
during the next year or two that made the losses of the 
big bull operators seem small by comparison. 

But more of that later. During this early stage of the 
bull market with which we are immediately concerned, 
there was gradually developing a new economic philos- 
ophy and a new market technique. In the days before the 
war there were certain yardsticks by which to measure 


stock values. It was common practise, for example, to \ 
place the limit of value at ten times earnings, but this 
criterion loosened by degrees, until at the peak of the 
bull market a price of twenty-five, or even forty, times 
earnings was not uncommon. Just before the final ad- 
vance started the head of a leading corporation volun- 
teered the opinion that fifteen times earnings was war- 
ranted in the case of a large corporation having further 
possibilities of expansion. 

Second only to this dictum was a rule of oscillation, or 
rhythm, which compelled a major advance to run its 
course within the space of 20 to 24 months. At the end 
of this period stocks were a "sale", according to trading 
practise. At that time the cyclical theory was universally 
accepted and short swings were not allowed more than 
two years in which to complete their movement. Every- 
thing that goes up must come down, said the trader, 
until he ran into this unprecedented market which car- 
ried on for a period of three years in one of its stages 
without a major reaction and over its entire course 
covered a span of seven years. In the face of this fact, 
opinion gradually swung around to the opposite extreme 
and as the movement progressed an increasing body of 
traders leaned toward the view that the market had 
become permanently established on a "higher plateau", 
as Professor Irving Fisher, of Yale, put it. 

Aside from the time factor, experience had indicated 
in other times that the maximum limit of advance in the 
averages was somewhere between 45 and 55 points. 
Beyond this point lay the danger zone and traders gen- 
erally turned bearish as it was approached. But more 
than once during the Big Bull Market the averages 
climbed 40 points within a single month and again the 
traders of the old school were confounded. Between 


these several reversals of form operators finally reached 
a state of confusion where all measuring sticks were cast 
to the winds and they allowed themselves to drift with 
the tide, which carried stocks to ever-increasing levels. 

Back of these changing trading practises lay a new 
economic philosophy which centred about the thought 
that the country was entering upon an era of prosperity 
that was never to end. There was to be a new day in 
industry and with the new day was to come a perma- 
nently higher level of stock values. After 1928 this view 
received powerful support from the administration of 
President Hoover, who was personally committed to a 
program whose ultimate objective was the complete 
abolishment of poverty. Out of Washington flowed a 
constant stream of pronouncements from government 
officials and advisers and even from the President him- 
self, the effect of which was to strengthen this belief 
immeasurably. To many it seemed that the millennium 
was at hand. 

Before the end of the first phase of the bull market 
this changing philosophy had begun to lay hold on the 
public imagination, but the "wise money" had its eyes 
on another portent the slowly unfolding process of 
credit inflation, which was the logical outgrowth of the 
cheap money policy of the Federal Reserve authorities. 
Irrespective of rule-of-thumb trading practises or diver- 
gent economic philosophies, this policy, if maintained, 
as it was, could not fail to move stocks up far beyond 
any levels that had ever been contemplated or even 
dreamed of. 

By the end of 1926 this movement had developed to 
a point where the averages had advanced 80 points, or 
almost 100 per cent; volume was running over three 


million shares a day and Stock Exchange seats had in- 
creased in value several times over. 

It is difficult to draw a parallel between the course 
of business and the course of the market. In a sense they 
go hand in hand, but the market is subject to technical 
factors which generally affect its action. Thus, at one 
time it anticipates business development, favorable or 
unfavorable; at other times it lags behind, as in 1922 
when business was well around the corner before the 
market began to look up. At all times the market is an 
uncertain factor, subject to whirlwinds that may at any 
moment develop cyclonic velocity without apparent 
cause. It is this, perhaps, that is responsible for its lure, 
for in this matter-of-fact age there is little room for 
high adventure and certainly few forms of adventure 
afford the thrills that the ticker provides. 

Before the Big Bull Market had its inception, or at 
least up to the short-lived movement of 1919, the mar- 
ket was essentially an investors' market, but it is not al- 
ways easy to draw a line between the investor and the 
speculator, since in recent years the trend of investment 
has been toward equities and the holder of equities is 
always gambling on the future. Perhaps the soundest 
distinction is to say that the investor seeks income while 
the speculator looks for higher values. During the 
early days of the bull market something of a battle was 
waged between these opposing forces, with the palm of 
victory finally going to the speculator. Investors who in 
times gone by had looked upon a return of more than 
five per cent as inherently dangerous switched over to the 
ranks of those who demanded nothing less than 100% 
profits. Not satisfied even with this appreciation, they 
took to margin trading and so figured to treble or quad- 
ruple their capital. In some cases they got out with their 


winnings but seldom failed to be lured back again by 
the advancing market. In the end most of their gains 
were wiped out, but not before they had been able to 
draw heavily against their paper profits. 

It was these withdrawals, lavishly expended, that laid 
the foundation of the pseudo-prosperity of the late 
Twenties. "Easy come, easy go" is an old saying but a 
true one, and profits made in the market quickly go back 
into circulation, generally in exchange for luxuries or 
other non-essentials. As in poker, you spend what you 
win and lose what you lose and about all that the aver- 
age operator in the market has to show for his winnings 
is a higher standard of living. This, in turn, calls for an 
expanding scale of operations, with the result that the 
speculator is soon in far over his head. 

Over and over again the truth of this was demon- 
strated during the course of the Big Bull Market, but it 
is also true that the increasing scale of expenditures 
worked directly to the advantage of many industries. 
Automobiles, furs, jewelry, radios, and the electrical 
contrivances and conveniences that soon flooded the 
market were in heavy demand and there was a noticeable 
expansion of business in these lines. Gradually this built 
up a concept of increasing prosperity, which, however, 
was not attributed to the excesses of speculators but to 
improvement in the technique of business. Increasing 
sales were laid to the achievements of advertising and 
a new order of salesmanship, rather than to the extrava- 
gances of those who had made money in stock specula- 
tion, and the mounting volume of production, in turn, 
called for the application of constantly increasing pres- 
sure on selling, so that we ran into a vicious circle to 
which there was no end. On this basis largely rested the 
so-called prosperity of the Twenties, which had its be- 


ginning back in the first stage of the bull market but did 
not reach its climax until late in 1929, when prosperity 
disappeared through one door as stock losses entered 
through another. 

To the man in the street the upward march of stock 
values during these years seemed a logical and under- 
standable thing. All around were evidences of increasing 
prosperity, superficial perhaps but none the less convinc- 
ing. The financial news was filled with stories of business 
achievement. Chambers of Commerce, Rotary clubs, 
Lion and Kiwanis clubs, the columns of the daily press, 
spread the news far and wide. "Captains of Industry" 
became a familiar term to be applied to a growing num- 
ber of industrialists whose achievements were con- 
stantly emblazoned in the press. In this new order we 
acquired a new form of veneration for these business 
leaders. Washed of the sins of a previous generation, 
they became demi-gods, and their standing in this new 
era was not entirely unmerited. To a marked extent they 
were apostles of clean dealing. Unlike business leaders 
in other times, with few exceptions, they were not given 
to corporate manipulation for stock market purposes. 
They did not rig up their balance sheets either for the 
purpose of elevating or depressing stock prices. Essen- 
tially they were administrators and executives. They 
went out to u bring home the bacon" and they did it. They 
were not manipulators. As time passed, many of them 
took a hand in the market, but they did not play the 
game with marked cards. Their advantage was little 
more than that of the ordinary trader and almost in- 
variably they bought for the "long pull". They had 
vision and optimism. They believed in the future of 
their country and of their industries. 

This was the foundation on which the Big Bull Mar- 


ket was built. To a large extent these factors originated 
during the early stages of the movement and made it 
easy to rear a structure which tended to be weaker and 
less enduring as it rose. If the market could have been 
held at the levels that were established in 1926 and 
1927 it is quite within the scope of possibility that a 
permanent new level of values would have been created. 
But there were other forces at work mainly those of 
greed, which were not satisfied until they had wrecked 
the structure which the new order of business leaders 
had built during the three or four year period that fol- 
lowed the end of the depression of the Twenties. 



IN THE World's Fair year 1893, a chubby-faced Eng- 
lishman, whose energetic manner belied his soft appear- 
ance, made his way to Chicago to become the head of 
the Chicago Edison Company Samuel Insull by name. 
Eleven years before he had landed at Castle Garden and 
promptly attached himself to Thomas A. Edison as his 
secretary. Within another thirty years he was to become 
the builder of an empire of Power owning or control- 
ling some $4,000,000,000 of assets, which he left behind 
him one night between dusk and dawn, according to the 
accepted version, later to emerge in European capitals 
as a hunted man, dogged by representatives of the Fed- 
eral authorities, who wanted him on charges including 
fraud, larceny and embezzlement. The story of his rise 
and fall is both an epic and a tragedy which has had few 
parallels in financial annals. 

How Insull came to find his way into the service of 
the Wizard of Menlo Park is not of record but he made 
good use of his opportunity. No less a glutton for work 
than Edison himself, it is related that on the first day 
of his employment the inventor kept him hard at work 
until midnight and then told him to return again at six in 
the morning. But the young Englishman was equal to 
the test and morning found him on the job ahead of his 


employer. Starting as secretary and clerk, he tended to 
correspondence, kept books, signed checks, handled the 
inventor's personal affairs and in time became his Man 
Friday. Those were the days when Edison was still 
struggling for recognition and it is evident that Insull 
served him well, for, as his employer's interests en- 
larged, he was thrust into places of responsibility, be- 
coming by the time he was thirty a vice-president of the 
budding Edison General Electric Company, of Schenec- 
tady, New York. 

Naturally, Insull's association with Edison brought 
him into favorable notice and it was not long before an 
opportunity fell his way to become head of the Chicago 
Edison Company. The story of how this came about is 
typical. The Chicago company had been struggling 
along without competent management and the owners 
finally came to Edison in search of a new head. Edison 
referred them to Insull, who listened to their story and 
when they had finished took them off their feet with this 
laconic advice: "Take me", he stated with finality, "I 
can do the job better than any man in the country". They 
did and in short order he was on his way to Chicago. 

Insull found Chicago to his liking. The rough and 
ready, bluff and hearty, open-handed atmosphere of the 
fast-growing Queen City of the West suited him and his 
methods were not out of place. Suave and resourceful, 
he knew how to cajole, how to command, how to 
threaten and it was said that he was not above other 
means of persuasion if needed to achieve his ends. In 
fact, as early as 1926, when Smith and Brennan were 
engaged in a rough-and-tumble fight for a seat in the 
U. S. Senate, it was charged that he ladled out almost a 
quarter of a million dollars to both sides without partial- 
ity, in an effort to ensure himself a place on the band 


wagon, whichever won. Smith won the election but lost 
his seat in the Senate when the facts came out under 
investigation and Insull became the center of a national 
scandal. But Insull was not always a petitioner for 
favor. He knew how to demand and his domineering 
manner early brought him the sobriquet of "Insult" 

In those days the utility business was not all plain 
sailing in Chicago. The Edison Company was one of a 
half dozen poorly equipped concerns that were putting 
on a "knock-down-and-drag-out" fight for the city's 
electric business. Insull quickly had his own company on 
its feet. Then one day, differing with his Board of Direc- 
tors over a matter of policy, he put on his hat, walked 
across the street and took charge of a rival company, the 
Commonwealth. Within ten years the new company had 
absorbed his original concern and Insull sat in the 
driver's seat. 

About this time an obscure genius in the East invented 
a new form of turbine which revolutionized the genera- 
tion and transmission of electric power. Quick to see its 
advantages, Insull was the first to install this turbine 
and so got the jump on all competitors. In doing this he 
took a $700,000 gamble, but with this club four years 
later he was enabled to force his larger competitors into 
a merger on his own terms. 

This event marked the turning point of his career. At 
last he was on the road to power over Power, and within 
a few years, by pulling strings here and wires there, he 
had welded together a group of independent plants in 
sixteen nearby counties, serving 200 cities and towns 
and 6,000 square miles of territory, into the first of his 
great holding companies, Public Service Company of 


Northern Illinois, later to become a keystone in the arch 
of Middle West Utilities. 

In the meantime, Insull had put his brother, Martin, 
through Cornell University, where he was turned out 
with the degree of Electrical Engineer, after which he 
busied himself in developing a group of electric light 
plants and interurban lines in Southern Indiana and 
Kentucky, which were later to become a part of the In- 
sull System. In more recent times, it may be added, 
Martin Insull shared the self-imposed exile of his older 
brother, fighting extradition from a little town in 
Canada on charges growing out of the Insull collapse. 

Came now the dawn of the high-tension power era. 
Ever on the outlook for economies in production or 
operation, Insull sensed the wastefulness of maintaining 
separate plants for the generation of power at every 
small center and was among the first to preach the 
development of super-power lines. But he needed a ve- 
hicle to co-ordinate the activities of properties which 
supplied high-tension power to groups of isolated or 
scattered communities and in 1912 the Middle West 
Utilities Company was formed for this purpose. Con- 
stantly increasing the scope of its operations by merger 
and consolidation and by the installation of turbine 
generators that developed up to 100,000 kilowatts per 
hour or more, this intricate network of companies ulti- 
mately reached out and supplied heat, light or transpor- 
tation to 5,000 communities in thirty-two States, as well 
as Canada and Mexico. It was a Colossus of Power 
spreading its tentacles over almost the entire nation 
where ordinary holding companies seldom bit off more 
than limited territory. In time it came to supply 1,718,- 
000 customers representing a population of some 
10,000,000, employed 32,000 people and had almost 


600,000 security holders. Its power lines covered 44,500 
miles. Its gas mains 10,600 miles. 

As his empire grew, Insull became a power to be 
reckoned with both in the business and social world of 
Chicago. It was not long before he came to be recog- 
nized as its "foremost citizen'* and not even unsavory 
disclosures of political corruption involving the Power- 
King which later came to light affected his position. 
Britisher as he was, he was adopted by Chicago and 
given a place even more exalted than that of its native 
son, for Chicago likes to do things in a big way and 
Insull gave it the biggest thing in the power industry. 
With its four billions of assets, it was likewise the big- 
gest single industry in Chicago, if not in the whole 
country. In appreciation Chicago poured its millions 
into Insull's lap with a prodigal hand. Its banks granted 
him fabulous loans. Its investors bought his securities 
without stint or question. Its government gave him any- 
thing he asked for, not realizing often that he was the 
government itself. He was a king in his own right 
and when disaster came Chicago was quick to blame 
the debacle not upon Insull and his squandered millions, 
but upon a conspiracy of Wall Street bankers who were 
jealous of the growing financial power of LaSalle 

With Insull it was always "business first". He had no 
principles or prejudices, no likes or dislikes, no sympa- 
thies or aversions that did not dissolve under that 
magic formula. In its name he built opera houses and 
played politics, imported art works and supported 
boodling politicians, bred fine cattle and subsidized can- 
didates for public office. But he never forgot what he 
was after. Privileges for his power companies, profit- 
able franchises, favorable ordinances and rate adjust- 


ments and, last but not least, more money from the 
investing public always more money. 

At the height of his power Insull was very much of a 
lone wolf. He had many subordinates but few advisers. 
A nabob in his own land, he played no favorites and 
brooked no opposition. It was not until he had turned 
seventy that his power was tested and then the challenge 
came from overseas. In Alfred Loewenstein, the Bel- 
gian, Europe boasted of an industrial empire builder 
who had as much to his credit as Samuel Insull. A pio- 
neer in the rayon industry, he built up enormous interests 
through the purchase of wartime plants and their con- 
version into rayon factories. Sensing the growing im- 
portance of power as an industrial factor, he used his 
profits to acquire power properties everywhere until he 
had assembled a string of 300 companies loosely scat- 
tered all over the world. Early during 1928 he turned 
his attention to America and fixed his eyes on Insull's 
Commonwealth-Edison, People's Gas and Public Serv- 
ice of Northern Illinois as desirable properties. Possess- 
ing vast resources, he set out to buy control in the open 
market. Then ensued a battle of titans, in which both 
Loewenstein and Insull stretched their resources to the 
limit and pushed the market prices of the stocks at issue 
sky-high. In ten-point leaps the stocks bounded up and 
in order to meet the challenge Insull drew heavily both 
on his private resources and on the resources of his 
other companies. In the final result, the palm of victory 
rested with Insull, since the battle was ended by Loewen- 
stein's tragic death-leap from an aeroplane, to which he 
was driven possibly by the strain of his struggle with 
the American Power-King. 

Barely free of this menace and still under the financial 
strain that it entailed, during the following year Insull 


faced another challenge, this time from the astute and 
ambitious Clevelander, Cyrus S: Eaton. Eaton already 
had a foothold in the power industry through his control 
of the United Light and Power Company and, like Loe- 
wenstein, he turned his eyes longingly toward InsulPs 
Chicago and Illinois properties. To attack Insull at this 
point was a blow at the heart, since these properties 
were not only the keystone of his great system, but were 
the very ones that he had built up with his own hand. 

In preparation for the struggle, Eaton formed a huge 
investment trust, Continental Shares, Inc., which pro- \ 
vided him with a fighting fund of some $150,000,000, 1 
mostly contributed by a gullible public. Eaton started 
to buy late during 1928. Of course, Insull determined 
to fight and this, as he had learned from bitter experi- 
ence, took money, so he countered immediately by 
forming an investment trust of his own two of them, 
in fact. First came Insull Utilities Investments, Inc., to 
which the family holdings were turned over in return 
for a generous portion of the capital stock. New capital 
was obtained through offering a 5% debenture carrying 
rights to buy common stock at $15 per share. By July, 
1929, the same common stock was selling at $149 per 
share. Surprised and elated, Insull formed a second 
trust, Corporation Securities, Inc., which under shrewd 
manipulation met with equal success in the market. 
Within a short while the securities of both trusts were 
selling at a gross market valuation amounting in round 
figures to $400,000,000. 

In the meantime the battle with Eaton had gone 
merrily on, but with stock values going through the 
roof the drain upon both antagonists was terrific. As 
fast as funds flowed into their respective investment 
trusts they were poured into the market to take up stocks 

of the companies at issue. As these stocks shot up in 
value under buying pressure the demands upon the rival 
financiers were correspondingly increased and soon both 
interests were at their wit's end to find the money needed 
to carry on their gigantic operations. Of course, the 
advantage was on Eaton's side all along, since Insull 
was under the double necessity of protecting his control 
and at the same time supporting the market on the myr- 
iad of Middle West stocks which his trusts held in order 
to maintain the value of the investment trust stocks 
which were his main source of new funds. It was a battle 
between Cleveland and Chicago, backed by the millions 
of both cities and led on the one hand by an old man 
who was a newcomer at market manipulation and on the 
other by a young Napoleon of finance who knew every 
trick of the trade. Eaton proved the smarter of the 
two. Sensing the coming break, he drew out of the battle 
in midsummer and consolidated his position, while he 
left Insull in possession of the field with the doubtful 
advantage of standing the gaff from repeated "bear" 
raids, which increased in intensity as the general market 
showed signs of weakness. 

Came the Big Break and Middle West dropped from 
over 500 to less than 200. In an effort to bolster up the 
situation, Insull had declared a ten-for-one split-up in 
Middle West stock and offered rights at 200, and it 
became essential to hold the stock above this figure if 
the public could be expected to take up these rights and 
so supply him with more millions, the need of which 
was growing. Drawing on his fast diminishing reserves, 
he put out a flood of buying orders and on November 
4th left his office the apparent victor, in order to attend 
the opening performance at the $20,000,000 Civic 


Opera House, which he had sponsored and largely fi- 
nanced for the benefit of the people of Chicago. 

With the market seemingly in hand and the recipient 
of a great ovation himself, Insull was a proud and happy 
man that night. But the battle was not yet won. For the 
wily Eaton was on the sidelines, ready to pounce at the 
first sign of weakness, as during the months to come he 
was to do many times, picking up stock at low figures, 
where the Power-King had paid the top of the market. 

Before the year ended Insull's troubles had begun to 
multiply fast and furiously. His bankers called upon him 
to support the market on Middle West stock under a 
stock rigging agreement which has been pronounced 
grossly illegal. New issues were put out in order to 
supply more funds and they, in turn, had to be supported. 
As the year wore on and the knot tightened, Insull 
turned to friends, associates, employees. He "let them 
in'* on juicy syndicates and distributed dubious under- 
writing profits. He raised money in New York, London, 
Paris, Antwerp and Amsterdam some $60,000,000, 
all told, from European connections. But even this was 
not enough. The money poured out faster than it flowed 
in. There was no bottom to the rat hole. 

In those days it is charitable to say that Insull lost 
his head under constant pressure from Eaton, who was 
"sniping away" from the sidelines when he was not 
engaged in open raids. He was driven frantic. Accord- 
ing to the government prosecutors he applied the money 
that came into the treasuries of his companies with scant 
regard for its source; he shifted assets around like a 
prestidigitator in a side show; he descended to the level 
of the shell and pea game. A conservative for forty 
years, always to be counted on to discourage speculation 
in his stocks, reputed never to have had a stock broker- 


age account, he suddenly became the wildest operator in 
LaSalle Street and once having embarked on this course 
there was no turning back until ruin stared him in the 

The struggle reached its climax in the summer of 
1930. By this time Insull was convinced that, in the per- 
son of Eaton, he was fighting the embattled money 
powers of Wall Street. Needless to say, this was far 
from fact. The truth was that he had met his master, a 
quick-witted, shifty antagonist, with apparently un- 
limited resources, who won all the skirmishes and could 
never be lured into open battle. Eaton had acquired 
about an $% interest in Commonwealth-Edison, which 
was the chief bone of contention, second only to InsulFs 
in size. It gave him a right to participation in control. 
Backed to the wall, Insull sought a meeting with his foe. 
It was held in Insull's palatial offices at the top of the 
Commonwealth-Edison building. A truce was arranged. 
At the moment Eaton was engaged in another epoch- 
making struggle, where he stood in Insull's shoes. He 
was trying to block a merger of the Bethlehem Steel 
Corporation with Youngstown Sheet and Tube Com- 
pany, which was his "baby", just as Commonwealth- 
Edison and Middle West had been to Insull. He needed 
all the money he could lay his hands on. He was not 
hard to deal with but he made a trade that wrote the 
word "finis" to Insull's career. 

As the story goes, the Clevelander made a hurried 
notation of his holdings and pushed it across the table 
to Insull. "What will you take for the lot ?" the old man 
snapped back. 

The terms of settlement have not yet been aired in 
public but it is understood in LaSalle Street that Eaton 
got some $50 per share above cost for 150,000 shares 


in the several companies at issue, 75% in cash and the 
rest in Middle West stock. Insull got back his peace of 
mind, or so he thought, until he came "to pay the 

In order to pay the price Insull went in pawn to the 
bankers for the last time. He borrowed $110,000,000 
and put up securities worth $440,000,000 to secure the 
loan. An apostle of the New Era, he believed he was 
safe in taking this step, for was not prosperity "just 
around the corner?" But whether his course was justi- 
fied or not, he had no choice. He had to have the money. 

Facing the loss of his properties if his loan could not 
be met, Insull now inaugurated the most spectacular 
high-pressure security selling campaign of all time. 
Honeycombing the country with offices and representa- 
tives, forcing every employee into service from high 
officials to elevator boys, organizing a sensational and 
outrageous campaign of propaganda, he set out to make 
the investing public take over his burden. His chief stock 
in trade was a widely advertised charge that the Mor- 
gan interests had attempted through Eaton to secure 
control of his properties. So far as it is possible to ascer- 
tain, this charge had no basis in fact, but it was produc- 
tive on a vast scale. Money poured in by the millions 
but in a constantly thinning stream as the depression 
gained in severity, until the day came when Insull was 
forced to face the fact that he had reached the end of his 
rope. It had been a long rope, such as Fate occasionally 
vouchsafes to those who destroy themselves, and at the 
end there was a hangman's knot. As long as he could 
browbeat or wheedle money out of banks or the deluded 
public, Insull was riding high, but when the well went 
dry he was through. He had built up a pyramid whose 
maturing obligations could only be met out of funds 

from outside and when the source of such funds dried 
up it was all over. In the end he came to Wall Street it- 
self and Wall Street unwisely loaned him some needed 
millions, but when the loans fell due it demanded its 
pound of flesh. The "first Citizen" of Chicago was 
merely a beggar in Wall Street. 

The final collapse of the House of Insull started with 
the crash of his investment trusts, whose capital had 
been recklessly expended in the historic battle with 
Eaton, followed by the receivership of Middle West 
Utilities. This happened in June, 1932. He had post- 
poned the evil day for two long years. Sadly, reluctantly, 
Insull gave up his throne. On a single day, a stranger in 
his own offices, he signed eighty-five resignations from 
official connections with the companies which he had 
dominated in other, happier times. Within another 
month he was on the high seas, headed for parts un- 
known, in a hopeless flight to escape the hounds of jus- 

This is the personal tragedy of Samuel Insull. Back 
of it there is a larger tragedy, colossal in scope, a tragedy 
of lost or stolen millions, blasted hopes and wrecked 
lives. Altogether it is estimated that as much as $2,000,- 
000,000 vanished in the Insull orgies, leaving a trail of 
broken, suffering families, crippled banks and wrecked 

Gone now is the pride that Chicago took in its Power- 
King. The kindest word that has been said of him came 
from one of his lawyers : "Insull's trouble was colossally 
bad judgment. He accepted the promises of statesmen 
and other big business men at face value. He overesti- 
mated his powers". 

In his favor it can be said that, facing disaster, he 
threw his own fortune into the hopper along with the 


public's money but this is tempered by the fact that 
in no other way could he have got the public in. It was 
a measure of desperation. 

As this is written, Insull has just been acquitted of 
the first of the charges brought against him, that of 
using the United States mails to defraud investors. 
Whether he will be brought to trial on the remaining 
charges or whether prison doors will ever close behind 
the erstwhile Power King remains to be seen, but enough 
has already been disclosed to indicate the disastrous 
consequences of his collosal operations as well as the 
necessity of protecting the investing public from the 
activities of men of his vast ambition and recklessness. 

As a measure of poetic justice, it should be added that 
InsulPs nemesis, Cyrus S. Eaton, fared no better, for 
he lost his all in the struggle with the Bethlehem Steel 
crowd and emerged from the battle, like Insull, shorn 
of wealth, reputation and power. 


PRESIDENT COOLIDGE had barely taken up the 
reins of office when disclosures of grave scandals during 
the previous administration began to come to light. De- 
spite the halo that surrounded the fine head and dignified 
person of the "martyred" president, Warren G. Hard- 
ing, the impression had got abroad that he was in the 
hands of corrupt and unscrupulous politicians who were 
feathering their nests at the expense of his good name, 
and in time these suspicions were amply justified. Find- 
ing ready accessories in a group of dominant figures in 
the oil industry, who were not unknown to Wall Street, 
they unloosed a series of transactions which shook 
financial circles when the facts were unearthed. The 
unearthing was effected by the Senate Committee on 
Public Lands, whose chairman was the able and distin- 
guished senator from Montana, James J. Walsh, later 
to be selected as Attorney-General, in President Frank- 
lin D. Roosevelt's cabinet, although death claimed him 
before the appointment took effect. 

For years the oil industry had faced decreasing re- 
serves in the known supply of oil land and, as a result, 
operators had cast envious eyes on vast tracts of oil- 
bearing Government lands, which had been legally set 
aside for possible future needs of the U. S. Navy. The 



most extensive of these reserves were located at Elk 
Hills, California, and Teapot Dome, Wyoming, and 
were estimated to contain upwards of half a billion bar- 
rels of oil, all told. These reserves were in considerable 
danger of being depleted by neighboring wells and there 
had been a good deal of discussion in the Navy in regard 
to ways and means of preserving the supply, one group 
of Navy men arguing for development by the govern- 
ment and another being disposed to lease the lands to 
private interests, with a view to using only the royalty 
oil for reserve purposes. The Wilson administration had 
been in favor of government drilling, but when Albert 
B. Fall took office as Harding's Secretary of the Interior 
he quickly changed this program. 

Originally the lands were under the control of the 
Navy Department but at Fall's request they had been 
transferred to the custody of the Department of the 
Interior by an executive order issued by the President. 
Fall was friendly to certain large oil interests; in fact 
he owed his appointment to them, and apparently he 
lost no time in taking care of his friends. Without the 
formality of competitive bidding he leased the Elk Hills 
Reserve to Edward F. Doheny's Pan-American Com- 
pany and the Teapot Dome Reserve to Harry F. Sin- 
clair's Mammoth Oil Company. In the course of the 
transaction, it later transpired that some $260,000 in 
Liberty bonds, which had been the property of Sinclair, 
found their way into Fall's safety deposit box, and the 
Secretary's good friend, Doheny, made him a little 
"loan" of $100,000, without interest or security. 

So much for that. On the face of it, ignoring the fact 
of Fall's "cut-in", the transaction was regular and legal 
and the problem of the disposition of the Navy's oil 
lands appeared to be settled for all time. But, in digging 


around, Senator Walsh stumbled upon some bits of 
evidence that aroused his suspicions and he began to dig 
deeper, with results that finally led to the enforced ab- 
sence of a number of leading oil men and a year's term 
in the penitentiary for Secretary Fall, not to mention 
the resignation of at least two of the shining lights of 
the Harding cabinet Secretary of the Navy Denby 
and Attorney-General Daugherty. 

The full facts were long in coming to public notice 
something over eight years, to be exact. From the first 
the investigation met with opposition, not only from the 
Coolidge (Republican) administration, but from busi- 
ness in general, which was in a mood not to be disturbed. 
It was willing to forget the past in exchange for a free 
hand in the present. But the facts would not down. One 
by one, under the searching inquiry of Senator Walsh, 
they leaked out, and in the last analysis provided a 
background for what was undoubtedly the most shame- 
less and corrupt chapter in our political history. 

Briefly, this is what was disclosed, partly through the 
Senate inquiry and partly in the course of testimony in 
court It was not only a record of political bribery but 
of corporate double-dealing and violation of trust which 
opened the eyes of the public to the possibilities of per- 
sonal profit inherent in irresponsible corporate man- 

We begin with the Doheny transaction. When Secre- 
tary Fall assumed office he was decidedly "hard up". 
In fact, he appeared to have difficulty in digging up car- 
fare to get to Washington, when suddenly he blossomed 
forth with a bundle of hundred-dollar bills, which he 
handed out as carelessly as if they were street car tokens. 
Hearing of this sudden affluence and suspecting some 
connection with the Doheny lease, Senator Walsh acted 


on a "hunch" and asked the Secretary for an explana- 

Apparently caught off his guard, Fall invented a 
"cock-and-bull" story to the effect that he had obtained 
a loan of $100,000 from Edward B. McLean, owner of 
the "Washington Post" and a staunch supporter of all 
Republican administrations. Senator Walsh was not 
satisfied with this explanation. He sent for McLean, 
who was at Palm Beach, but McLean reported that he 
was unable to return to Washington to testify. So Walsh 
went to Palm Beach, where he pried out of McLean an 
admission that he had loaned Fall the $100,000, but it 
had been in the form of three checks, which the meticu- 
lous secretary had returned unused. Obviously this did 
not explain the little matter of the hundred-dollar bills 
and Fall was obliged to invent another story, which he 
promptly did. 

This time he stated that he had obtained the money 
from Doheny, and backed up his story with testimony 
from Doheny himself to the effect that it was a loan 
made "to accommodate an old friend". Of course, the 
fact that the loan coincided with the lease of Elk Hills 
had nothing to do with the matter, the administration's 
defenders argued, but some scepticism was aroused by 
the disclosure that the money had been paid in cash, all 
in new hundred-dollar bills, which, as it later developed 
had been carried from New York to Washington in a 
satchel by Doheny's son-in-law. On the stand Doheny 
asserted that Fall had given his note in evidence of the 
obligation but when pressed to produce the note he dis- 
played a strange ignorance as to its whereabouts. In the 
end the alleged document turned up in the possession of 
Mrs. Doheny, or what was left of it, for the note had 
been torn in half and the part containing the signature 


was missing. Notwithstanding these spurious explana- 
tions, neither Fall's protestations nor Doheny's unctuous 
self-justification availed, for when the facts finally got 
before a jury the erstwhile Secretary was convicted. 
After a long legal fight to escape imprisonment, coupled 
with tearful pleas for mercy on account of the impair- 
ment of his health, Fall went to prison eight years after 
the happenings in question. 

The second item in the list of crimes committed in the 
name of "Black Gold" savored more of the machina- 
tions of Big Business, although it also contained some 
elements of comedy. It all started with a friendly meet- 
ing of a group of influential and respected oil men in 
New York, including Col. E. A. Humphreys, owner of 
the prolific Mexia oil field; Harry M. Blackmer, of the 
Mid-West Oil Company; James E. O'Neil, of the 
Prairie Oil Company; Col. Robert W. Stewart, Chair- 
man of the Board of the Standard Oil Company of 
Indiana (who was to lose his job as a result of this 
innocent-looking affair) ; and Harry F. Sinclair, presi- 
dent of the Sinclair Consolidated Oil Company. At this 
meeting, which occurred only a few months before the 
Teapot Dome lease, plans were laid for the formation 
of a corporation the Continental Trading Corpora- 
tion, later proved to be a dummy which first agreed to 
purchase from Colonel Humphreys 33,333,333 barrels 
of oil at $1.50 per barrel and then in turn contracted to 
sell the same oil to Sinclair and O'Neil's companies at 
$1.75 per barrel, thereby netting a neat little profit of 
25c per barrel, or approximately $8,000,000 on the 
whole transaction. 

Needless to say, the "influential and respected" oil 
men who rigged up this raid on their companies' treas- 
uries constituted the dummy company and subsequently 


drew down from $750,000 to $800,000 apiece, which, 
in some cases, they omitted to report to their companies 
over a period of years. According to his counsel Black- 
mer had not reported the transaction as late as 1928, 
though the profit was divided up in 1921. O'Neil turned 
over his share in 1925. Stewart handed his share to an 
employee of his company but failed to notify his di- 
rectors until 1928, when the facts began to come out. 
Sinclair likewise waited until 1928 before giving up his 
share, or what was left of it after disposing of a por- 
tion in the manner related below. 

As it happened, the profits in question were dis- 
tributed in the form of Liberty bonds and, strange to 
relate, a quarter of a million or more, which had orig- 
inally gone to Sinclair, later turned up in the possession 
of Secretary Fall, as well as in other queer places, in- 
cluding the treasure chest of the Republican National 

The facts related above were not easy to get at. They 
were dragged out of reluctant witnesses, in the face of 
much twisting and turning, and incidentally led to very 
extended vacations on the part of Blackmer, O'Neil 
and Stewart, who found the climate of Southern France 
and South America quite congenial while the trail was 
hot. Likewise, they led to sudden and rather drastic 
changes in the management of the Standard Oil Com- 
pany of Indiana, when the Rockefeller interests were 
taken overnight with an acute attack of conscience and 
forced the resignation of Col. Stewart. Sinclair, like 
Doheny, was acquitted after trial, possibly due in part 
to the absence of his colleagues, but he served a thirty- 
day sentence in jail for contempt of court and has es- 
caped none of the moral obloquy which all those who 
participated in this dubious transaction richly deserved. 


As a humorous sidelight on this tragic affair, Archie 
Roosevelt, son of the immortal Teddy (and brother of 
Harding's Assistant-Secretary of War) appeared as a 
voluntary witness and asserted that Sinclair's confiden- 
tial secretary had informed him that Sinclair had paid 
"sixty-eight thousand" dollars to the manager of Fall's 
ranch in New Mexico, but when the secretary was called 
to the stand it appeared merely that Archie was a bit 
hard of hearing and what he actually heard, according 
to the secretary, was that Sinclair had sent over "six or 
eight cows" a slip of hearing that is easy to under- 
stand "sixty eight thous" for "six or eight cows". On 
further inquiry it developed that the cows in question 
turned out to be a horse, six hogs, a bull and six heifers ! 

Possibly the strangest and most significant develop- 
ment of this epoch-making investigation was the acute 
silence that it engendered on the part of all supporters 
of, or participants in, the administration. In the person 
of the then President, Calvin Coolidge, this was to be 
expected, since he had earned a well-deserved reputation 
for silence on all occasions, but it came with less grace 
from other members of the dominant party, including 
the noted Secretary of the Treasury who had been 
"ballyhooed" far and wide as the "greatest Secretary 
since Alexander Hamilton" Andrew Mellon. In fact, 
Mr. Mellon or "Andy", as he came to be dubbed at 
this time was very close to being tarred with the same 
stick that besmirched Mr. Fall. In tracing the devious 
course of the Liberty bonds which had come out of the 
Teapot Dome transaction, $50,000 worth were followed 
into the possession of Will H. Hays, the Chairman of 
the Republican National Committee. Hays stated that 
he had obtained them from John T. Pratt then con- 
veniently dead and Pratt's cashier dug out of the 


musty records of the Pratt estate a card on which Mr. 
Pratt had made a record of the disposal of the bonds. 
He also had added a pencilled notation, which merely 
included these words : 





Senator Walsh was particularly impressed by the 
name which began with the first letter of the alphabet, 
but the cashier who was also loyal to the Republican 
party insisted that it was "Candy", not "Andy", and 
when it was ascertained, with the aid of a magnifying 
glass, that he was wrong he stated blandly, "I have no 
idea who 'Andy' can be. I can think of no one known as 
'Andy' ". 

Naturally everyone else but the secretary knew who 
"Andy" must be and there were many "wise-cracks", 
but the public saw nothing sinister, despite the fact that 
Mr. Mellon later admitted the identity of "Andy" and 
explained the real significance of the transaction. In 
order to cover up the source from which the Sinclair 
bonds came, it appeared that the astute Mr. Hays sent 
them around in blocks of $50,000 or so to financial sup- 
porters of the Republican regime and asked for their 
checks in return, which were duly entered as "contribu- 
tions", and so the National Committee realized on Mr. 
Sinclair's apparent generosity without involving the 
party. That is, until the real facts came out, for when 
the details were spread upon the records it was difficult 
to escape the conclusion that Mr. Sinclair had turned 
in the bonds as part of the "quid pro quo" arrangement 
that brought him Teapot Dome. 


In passing it should be stated that "Andy" was smart 
enough to refuse to accept his share of the bonds and 
so kept his skirts clean. What Weeks, Butler and Dupont 
did with theirs has never come to light. 

But in the long run these corrupt and spurious deals 
that both Sinclair and Doheny pulled off did them little 
good, for the courts voided both leases and the oil lands 
went back into government control, where they should 
have remained in the first place. In the process it may be 
added that soon after these events the Rockefeller 
interests so far recovered from the attack of conscience 
which they had vented on Col. Stewart as to enter into 
a partnership deal with the equally-besmirched Sinclair 
involving the acquisition and operation of the Prairie 
Gas and Oil Company, thereby indicating that business, 
like politics, makes strange bed-fellows and the prospect 
of a few millions of profit is a mighty good poultice for 
a seared conscience. 



DISCONCERTING as these early aberrations of Big 
Business appeared, events of far greater import were 
shaping up beneath the surface. As the practical business 
administrations of the post- Wilson era got their hands 
on affairs it began to be increasingly evident that a new 
inflationary movement was taking form. Whether this 
was due to the ineptitude of the political powers or to 
a deep-laid plot on the part of Wall Street cannot be 
definitely stated, but the evidence justifies more than a 
suspicion that both factors entered into the course of 

Deflation inevitably plays into the hands of bankers 
and inflation is an essential precedent of deflation. As 
a part of the cyclical process of panic and prosperity 
which has obtained in this country for a hundred years 
or more these phenomena follow each other with un- 
failing regularity. Periodically the pendulum swings 
forward and just as regularly it swings back again. In 
times of depression many choice plums fall into the 
hands of banking or other moneyed interests. In such 
times the foundations of great fortunes are laid by those 
who are shrewd or far-seeing enough to take advan- 
tage of those who are less fortunate or less equipped 
with foresight or financial resources. It was under such 



conditions that Rockefeller was enabled to gather in the 
units that entered into the Standard Oil Company and, 
at a later day, following the depression of the Nineties, 
J. P. Morgan brought about the reorganization of the 
railroad system of the country with enormous profit to 
himself and his associates. And so it has become axio- 
matic that the banker profits by the distress of the 
community as a whole and if he can anticipate or control 
the swing of the pendulum his position is one of great 

Under the existing order the key to inflation is credit 
and in this country the key to credit is the Federal Re- 
serve System. Since the changes in our banking laws 
which were occasioned by the Federal Reserve Act of 
1913, there had been a continual struggle for control of 
the Federal Reserve System between the Wall Street ele- 
ment and out-of-town banking interests. Led by Benja- 
min Strong, of the Bankers Trust Company, and with 
the active support of the Morgan interests, a determined 
effort had been put forth, even prior to the adoption of 
the act, to divert the control of the System to Wall 
Street. Reviving the central bank idea, they had argued 
for a central institution which was to control the flow 
and direction of credit, with the system as a whole under 
the control of bankers rather than the government. This 
effort had failed. Instead the act set up a group of 
twelve regional banks, which functioned independently 
in their respective territories and offered some assurance 
of an adequate distribution of credit facilities. In order 
to afford elasticity the act provided for rediscounting 
commercial paper held by member banks at the regional 
banks, but it also included a provision that enabled the 
management of the System to buy or sell government 
securities, thereby releasing or withdrawing funds from 


circulation in such amounts as the System saw fit. This 
was stated to be an emergency provision and resort to 
it was not contemplated in ordinary times. 

For twelve years the Federal Reserve System had 
been under the direction of W. P. G. Harding no re- 
lation of the President who served as Governor, a 
clear-headed, conservative banker of the old school, 
and the System had functioned with remarkable effi- 
ciency, but Harding held aloof from Wall Street in- 
fluences. With the exception of the consequences of the 
low rediscount rate maintained during the first two 
post-war years which, however, was beyond control 
of the directors of the System, as it had been decreed 
by the Treasury the Reserve System had withstood 
the effects of both inflation and deflation and had amply 
justified its existence. But the Governor was not a mem- 
ber of the President's party nor subservient to control 
by the Harding administration and accordingly at the 
end of his term of office his reappointment was not con- 
firmed. In his place the President nominated the then 
Comptroller of the Currency, D. R. Crissinger, a 
country banker from Harding's home town, Marion, 
Ohio. Apparently this appointment was merely another 
gesture in evidence of Harding's willingness to do some- 
thing for "one of the boys" but it had effects of real 
consequence, for by no stretch of the imagination could 
the new governor of the System be considered as equal 
to the task of directing the greatest credit institution in 
the world, whatever his other virtues may have been. 
As vice-governor the President also had appointed an 
up-state New York editor and politician who had had 
no banking experience and the effects were not long in 
making themselves felt. From the first the new manage- 
ment fell entirely under the influence of the Wall Street 


element, which was represented by the same Benjamin 
Strong who had led the effort to defeat the Federal 
Reserve Act prior to its adoption. Notwithstanding the 
emergency character of the provision of the act per- 
mitting the purchase and sale of government securities, 
it was not long before the System through the New York 
bank was making such investments in large amounts, 
thus releasing volumes of additional credit and building 
up the process of inflation that culminated in the crash 
of 1929. 

This process had its inception back in 1924 but it 
did not come into full play until 1927, when the Wall 
Street interests had entered upon the vast program of 
foreign and domestic financing which was made neces- 
sary by the engines of distribution that had been set up 
by the big banks through their security affiliates. From 
this point on the Federal Reserve System was domi- 
nated by the New York Reserve Bank and for all prac- 
tical purposes was merely an adjunct of Wall Street. 

In tracing the course of events it is not necessary to 
impugn the motives of those individuals, bankers or 
politicians, who were responsible. Doubtless they were 
guided by the principles of their kind. Doubtless, too, 
they were affected by the world delusion that led to a 
universal recourse to monetary or credit inflation as a 
panacea for the ills of mankind; but, whatever their 
state of mind, the results were the same as if they had 
set out deliberately to wreck the economic system. In 
Washington participation in the inflation movement 
may be fairly attributed to gross ignorance. Unfortu- 
nately our political system does not foster the develop- 
ment of broad-gauged leaders and during the years after 
the war the nation was cursed with a particularly inept 
and obtuse leadership mere machine politicians in 


most cases, who were interested only in jobs and in the 
continuation of an appearance of prosperity during their 
term in office or party dominance. On the other hand, in 
Wall Street there was a gross misconception both of 
national and of world conditions, which was aggravated 
by the influence of foreign bankers. Wall Street was in- 
ternational-minded and could see no hope for the world 
or profit for itself save through a distribution of our 
stock of gold or the credit that it made possible through 
international channels. To effect this purpose, however, 
required the subservience of the Federal Reserve Sys- 
tem, and this was readily obtained through the under- 
ground connections that ran between Wall Street and 
Washington, when W. P. G. Harding was ousted from 
the governorship and a more pliable creature substi- 
tuted in his place. From this point on the situation was 
in the hands of the bankers and they proceeded to carry 
out their policies of world rehabilitation without regard 
to consequences so far as this nation was concerned. 

At the end of the World War more than half the 
world's gold supply was held in the vaults of our treas- 
ury or of the Federal Reserve System and America was 
in a position to take the place of England as the chief 
creditor nation of the world. Looking a little further 
ahead than our own newly made group of bankers, Eng- 
land was not averse to resigning in our favor. She had 
other "fish to fry". Facing a debt of some six billion 
dollars to this country, with no assurance of adjustment 
and little hope of help from her own debtors, she could 
ill afford to divert her remaining resources to world 
recovery. Likewise she recognized better than we did 
the general insecurity of the foreign situation and feared 
to risk her diminishing reserves in financing an effort 
to bring about world recovery, the outcome of which 


was doubtful at the best. Where England had doubts 
and fears our bankers had none and they rushed head- 
long into the foreign markets with proffers of financing 
that ultimately attained a total of $8,000,000,000 in 
bond issues and another half billion or so in bank credits 
of one sort or another. 

In order to prepare the way for this enormous draft 
on our resources, the credit structure was rapidly ex- 
panded through the joint device of maintaining a low 
rediscount rate on the one hand and on the other by 
continuous purchases of government securities by the 
Federal Reserve System, which represented inflation 
just as really as, if less perceptibly than, the issuance of 
fiat money. The printing presses were not called upon 
but the same result was obtained by inflating the credit 

Concurrently with this increase in credit resources 
and resulting naturally from the unlimited supply of 
cheap money, domestic financing expanded on a similar 
scale and in the absence of a demand for commercial 
loans, which the state of business did not call for, the 
banks became loaded up with security loans, first to 
finance new flotations and subsequently to enable the 
investing public to carry their purchases of such securi- 
ties. Following the example of the big banks, which 
adopted a more than liberal policy of loans against the 
flotations of their security affiliates, smaller banks let 
down the bars on the same class of loans and soon found 
them the leading item in their portfolios. As a result, 
from 1924 to 1929 bank loans increased a full ten 
billion dollars. Since there was no increase in commercial 
loajus. during this period, it follows that the entire in- 
crease went into the speculative markets or into carry- 
ing security or real estate flotations. In other words, it 


became the rule for investors to invest, not savings or 
accumulated capital, but borrowings which they hoped 
to liquidate out of future earnings or appreciation in 
values. The consequences were not fully apparent until 
deflation set in and the banks were forced to liquidate 
this enormous volume of collateral on a falling market. 

In the face of these facts it is difficult to escape the 
conclusion that the most active agent in bringing about 
the depression of the Thirties was the enormous and 
over-rapid expansion of bank credit, which was effected 
with the aid of the Federal Reserve authorities at the 
instigation of Wall Street bankers. 

We have referred to the delusions of the post-war era. 
If the whole world had been suddenly afflicted with 
dementia praecox it could not have been madder than 
it became during the eight-year period that led up to 
the crash of 1929. It was as if the foundations of reason 
had been swept away and delusion reigned instead. The 
world was a madhouse. 

Undoubtedly this state of mind had its roots back in 
the war, which was itself a product of delusion a 
delusion of grandeur that affected the German people 
with paranoiac impulses and caused them to seek a 
"place in the sun" which was beyond their just deserts. 
Spreading through the embattled world, this delirium 
was fed by the fires of hatred and propaganda, making 
possible the wildest charges and counter charges and 
laying the foundations of a peace that was not to be 

After the war this delusion came to be chiefly one of 
inflation. Having developed the expedient of stretching 
currencies to unprecedented lengths in the course of 
financing the war, the world turned to rubber marks, 
rubber francs and liras and, last of all, to rubber dollars 


as evidenced by the inflation of our own credit struc- 
ture in a vain effort to rebuild itself. This delusion was 
more than a delusion; it became a mania which upset 
the point of view of the whole financial world and in 
America found ready acceptance among the race of 
international bankers that were hatched during the post- 
war period. Recovery was to be found not by way of 
liquidation and the ordinary processes of rebuilding but 
by way of inflation. That was the magic formula. 

Fortified by war profits, as America was, we were late 
in feeling the consequences of this universal state of 
mind. We had a taste of it during the two post-war years 
that ended with the depression of the early Twenties, 
but recovery came quickly and we did not attribute the 
excesses of those years to the delusion that affected the 
rest of the world. In fact, we looked upon ourselves as 
a race apart who were to be spared the consequences of 
the peace as we had been spared the ravages of the war. 

The inflation of currencies that shook the European 
economic system to its foundation occasioned in us 
merely a shudder, though it led to staggering losses 
through speculation in German marks. Altogether it is 
estimated that we handed the German people more than 
a billion dollars in gold in exchange for their worthless 
paper currencies, subsequently repudiated. But this was 
a mere incident of the post-war process of adjustment. 
We took our losses calmly as we set out to build up a 
prosperity of our own, which, by a strange process of 
reasoning, we established on a similar basis of inflation. 
Unquestionably the virus had affected us and it found 
eager devotees both in Washington and in Wall Street, 
but in banking circles at least there is little room to 
believe that the process was wholly one of delusion. It 
is difficult to believe that the Morgans, Bakers, Schiffs 


and other financial leaders of long experience both in 
Wall Street and in the money markets of the world were 
ignorant of the consequences that were sure to follow 
such unbridled inflation as came to be forced upon the 
country during the Twenties and was maintained for 
seven long years without protest from the big banking 
interests. In private it is possible that they expressed 
their doubts as to the soundness of such a course, but it 
was not until late in 1928, when Mellon hesitatingly put 
forth the suggestion that perhaps "the time had come to 
buy bonds", that any responsible financial leader even 
intimated in public that all was not right with the 
financial structure.* Mellon's timid warning, it may be 
mentioned in passing, was largely set at naught by the 
previously expressed confidence of President Coolidge 
in the new order. No less than Wall Street Washington 
was anxious not to "upset the applecart", and so the 
wheel was kept spinning at ever-increasing speed until 
catastrophe arrived. 

If one takes a look at the record as Al Smith would 
say it is not difficult to trace the course of inflation in 
the successive acts of the Federal Reserve authorities. 
To start with the rediscount rate: Dating from 1922, 
as the indices pointed to the end of the post-war de- 
pression, the rate was dropped in a series of sharp 
reductions from 1% to 3%%. In itself this action was 

* A notable exception should be made in the case of Paul M. 
Warburg, head of the International Acceptance Bank. Repeat- 
edly he issued warnings which, however, were largely unheeded 
both in the Street and in the public press. Despite this evidence 
of clearsightedness, it is to be recorded that during the early 
stages of the depression Mr. Warburg succumbed to the wide- 
spread belief that we had "turned the corner" long before the 
crisis had reached its full depth. 


not unsound as a means of hastening recovery, provided 
there had been in the minds of the Board a purpose to 
restrain the undue expansion of credit. But apparently 
no such purpose existed, for the rate was never allowed 
to exceed this point by more than half of one per cent 
(or a maximum of 4% ) during the next five years, and 
this in the face of growing speculation which carried 
with it an increase of two billion dollars in broker's loans 
while stock prices were practically doubled. 

During the spring of 1928 the authorities affected to 
see a light and the rate was hesitatingly advanced in two 
separate raises to 5%, but this half-hearted measure 
was of no avail for by this time the Wall Street crowd 
had taken the bit in their teeth and were running wild. 
A 1% per cent rate might have saved the situation, 
although it might also have slowed up the pace of the 
so-called Coolidge prosperity and certainly would have 
cut down the enthusiasm of speculators and the profits 
of the security factories in the Street, but an increase of 
only one per cent in the rate had no effect on the course 
of events. By this time the Dow-Jones averages stood at 
214, or more than three times the averages at the be- 
ginning of the movement, and brokers' loans amounted 
to $4,150,000,000. By the middle of the following year 
the averages had gone up another 140 points, to 4^ 
times their original figures, and brokers 1 loans reached 
the staggering total of $7,474,000,000 but the redis- 
count rate still held at 5%. Evidently the Federal Re- 
serve authorities had either thrown up their hands in 
despair or had meekly accepted the dictation of Wall 

In banking circles some effort had been made to con- 
trovert these facts by setting up the argument that stock 
prices do not necessarily follow the money rate, and, 


academically speaking, there is some merit to this con- 
tention. In such a complex organism as the financial 
structure of our security markets it is possible that no 
single factor controls the course of events; but it has 
been amply demonstrated that the psychological effect 
of tightening money invariably dampens the ardor of 
speculators and ultimately leads to a correction in the 
market and there is little doubt that a drastic increase 
in the rediscount rate during the early part of 1928 
would have been effective. 

But when the powers-that-be finally committed them- 
selves to a sustained inflation movement, as they did 
about the middle of 1927, they left nothing to chance. 
Uncertain perhaps as to the effectiveness of a low redis- 
count rate, they decided at the same time to call upon 
the emergency powers of the Federal Reserve System to 
buy government securities. Certain it is that there was 
no emergency that called for further inflation, but the 
bankers' and pool operators' shelves were loaded with 
securities awaiting distribution and they dared not risk 
a cessation of the forward movement. In order to avoid 
this danger they forced the Federal Reserve System to 
buy governments, as it was permitted to do under the 
Act of 1913, to the extent of $300,000,000, thereby 
throwing into the laps of member banks an equivalent 
sum to be used as a basis for additional credit. At the 
traditional ratio of ten to one this added roughly 
$3,000,000,000 to the credit structure, which was al- 
ready swollen beyond the danger point. As the effects 
of these measures made themselves felt early in 1928 
through further sensational advances in the market, 
the Board reversed itself in a belated effort to stem the 
tide of speculation and sold its governments; but this 
action came too late, for the momentum which the mar- 


ket had already acquired was sufficient to carry stock 
prices up for another year and a half and when correc- 
tion came it was correspondingly drastic. 

As we review the events of these epoch-making years 
it is evident that the activities of the Federal Reserve 
authorities were no more expert than they were wise in 
principle. They miscalculated wherever there was room 
for error and in the end created a Frankenstein monster 
of inflation which was responsible only for loss and ruin. 
But one thing is plain. When the New York bank came 
into control of the credit structure, as it did through 
the System's open-market operations, which are domi- 
nated by this bank, it assumed the functions of a central 
bank. For all practical purposes the battle that was lost 
in Washington in 1913 was won in New York in 1927. 
Once again Wall Street controlled the nation's credit. 



AS A W HOLE Wall Street is not crooked, but, in the 
days of its effulgence, it had its full share of rackets and 
perhaps the greatest of these was the Stock Exchange 
itself. Unlike the illicit liquor traffic of Prohibition days, 
the Stock Exchange is not organized along approved 
Capone lines. A trading mart in the guise of a gentle- 
men's club, it puts on plenty of "front". In fact it reaches 
right up into the seats of the mighty, for as this is written 
it is headed by Richard Whitney, brother of a partner 
in J. P. Morgan and Company. Staunch defender and 
apologist for the Exchange, from short selling to pool 
manipulation, Whitney can see no evil in the Stock 
Market. In the face of public criticism, congressional 
investigations and what-not, he is equally adamant. Like 
the Queen the Stock Exchange can do no wrong, in his 
eyes, and annually he releases a flood of propaganda in 
support of this contention. 

In justice to Mr. Whitney and his fellows it is only 
fair to admit that the Stock Exchange has a 1'egitimate 
place as a market for securities but in all truth it is to 
be added that this useful function has been consistently 
subordinated to that of providing a field for unbridled 
speculation. It has been a gambler's paradise. Since 
Alexander Hamilton's day, when the first "bull" market 



originated in wild trading in government scrip and ended 
in a crash that shook the Continental world to its foun- 
dations, the course of the Stock Market has been one 
long succession of speculative orgies followed by panics 
in which the gullible public has been shaken down for the 
benefit of insiders. If a racket is a form of organized 
plunder then the Stock Market is a racket in the full 
sense of the term. 

Wall Street is quick to resent such reflections on its 
good name and it has many defenders among the elect, 
but there is no gainsaying the fact that the Stock Market 
fattens on the victims of speculation and loses no oppor- 
tunity to foster a condition where speculation is rife. 
As a matter of plain fact, it is only under such conditions 
that Wall Street is "in the money", for brokers' and 
bankers' profits depend on volume and there is volume 
only in an active market. When one considers that there 
are only 1,375 members of the New York Stock Ex- 
change and a million-and-a-half-share day which is 
better than average for a bad market figures out at 
only about a thousand shares for each member firm, or 
perhaps a matter of $100 in gross commissions, it will 
be recognized that Wall Street cannot exist on a slow 
market. It is a known fact that there are houses in the 
Street whose overhead is so large (or at least it was 
during "boom" times) that it costs them upwards of 
$25,000 to open their doors each day, and hence there 
is constant pressure to whip up speculative enthusiasm 
with the aid of pool manipulation, propaganda, so- 
called inside information and all the other familiar 
devices that serve to whet the public appetite for what 
Wall Street has to offer. 

During the days before the crash propaganda was 
probably the main cog in the stock market machine. 


"I've got it straight from so-and-so that the National 
City crowd are behind a merger of Columbia and Victor 
and they are going to put the price of Columbia up to 
40 as a part of the deal". Or "I hear that Chase is behind 
Fox Film now. They are going to put the stock up 20 
points." It was this sort of vague and misleading in- 
formation, made up of half truths where it was not 
wholly false that drew the public into the bull market in 
over-increasing numbers. Call these deluded victims 
fools, if you will; say that they got just what they de- 
served, but don't forget that their false enthusiasm grew 
out of information, or misinformation, that originated 
in high places. 

Big operators in the Stock Market like to draw a line 
between themselves and the "small fry". Sneeringly 
they are wont to dismiss the little fellow with such a 
term of contempt as "sucker", while they take credit 
for having determined by study and analysis the action 
of great forces at work or for having, at vast effort or 
expense, built up connections or sources of "informa- 
tion" that are infallible. In other words, they admit that 
they play the game with marked cards and yet affect to 
set themselves up on a pedestal in contrast to the little 
fellow who takes an honest gambling chance. And yet 
how many among the thousands who perfected these 
avenues of information or put in these hours burning 
the midnight oil over their charts and statistics got out 
of the bull market with their profits? Practically none. 
They were "suckers" like the rest. They were victims 
of propaganda just one step removed from the man in 
the street, for their infallible sources of information 
were also playing a game and while they generously let 
their friends in at the start they seldom told them to 
get out until the party was over. 


In banking circles it is a favorite form of self-defense 
to blame the excesses of the Big Bull Market on "public 
hysteria". But who sowed the seeds of this so-called 
hysteria and who built it up into a national delusion? 
Was it not the same self-appointed custodians of public 
confidence who profited most by the wave of hysteria? 

Without question the biggest racket that flourished 
during "boom" times was the propaganda racket. It per- 
meated the whole structure of the Street. It dealt in 
misinformation and its instruments extended all the way 
from customers' men to tipster sheets and paid publicity 
promoters. In between lay the market letter writer, the 
radio counsellor, the investment counsel himself, news- 
paper financial writers, statistical services, financial 
magazines, bank bulletins, and the whisperers and 
prophets of the Street, whose name was legion. 

What tales were circulated under the authority of 
big brokerage houses about such stocks as Radio, Inter- 
national Telephone and Telegraph, Montgomery- 
Ward, United Aircraft, Case Threshing Machine, 
Niagara-Hudson, Electric Bond and Share and Ameri- 
can and Foreign Power? Read the market letters that 
were put out before the Big Break. Sandwiched in be- 
tween sanctimonious words of caution and conservatism 
you find a never-ending propaganda for mounting prices 
based upon a new level of stock values, which was a level 
only in so far as the bottom was concerned. On the up- 
side there was to be no limit. In the face of all previous 
experience there was to be no top to this market. 

Did any responsible house put out such information 
as this : "It is evident that the market is now undergoing 
a process of inflation which has had no parallel in all 
financial history. From this condition there can be only 
one outcome collapse, complete and terrible, which 


will wipe out paper profits and reduce stock values to a 
mere fraction of present averages. Investors and specu- 
lators alike will be well advised to get out of this market 
and STAY OUT". 

Not so long as brokerage houses were dependent on 
commissions for their bread and butter or participated 
in the pool operations with which the market was honey- 

Undoubtedly a prime factor in bringing about the 
state of hysteria with which the public was infected 
during these ebullient times were these self-same pools. 
A pool is a joint operation undertaken by a group of" 
individuals, usually with the aid of brokerage houses 
(whose customers provide fuel for the movement), the 
object of which may be either to raise or to depress 
prices in a given stock. The pool buys and sells, trusting 
that the balance will be on the right side and generally 
trying to avoid disclosure of its objects by secrecy or 
misleading actions. Its chief object is "distribution" 
which is another term for unloading on the public. In 
order to accomplish this result it calls upon all the 
known devices for influencing the market but its main 
reliance is on the rumor factories and publicity promo- 
ters which infest the Street. 

Typical of such operations was the Sinclair-Cutten 
pool in Consolidated Oil which was carried through 
during the latter part of 1928. As his contribution 
to the pool, according to the testimony submitted be- 
fore the Senate Banking and Currency Committee, 
Harry F. Sinclair caused to be sold to his friend, A. W. 
Cutten, of Chicago Wheat-pit fame, 1,130,000 shares 
of Consolidated Common at $30 per share in the face 
of a market ranging from 32 to 35^ at the time. Cut- 
ten paid no money. He simply obligated himself to take 


the stock at 2 to 5% points under the market and 
promptly shifted his burden to a syndicate consisting 
of Blair and Company, Chase Securities Corporation, 
the privately-owned Shermar Corporation of Mr. Wig- 
gin (head of the Chase National Bank), Mr. Sinclair 
and himself. A trading group was then formed to buy 
and sell the shares with the ultimate object of passing 
the stock along to the public at as high a price as the 
public would stand. The trading account was managed 
by a partner of E. F. Hutton and Company, highly 
touted members of the New York Stock Exchange. 
With the aid of the large following of this respected 
house the deal was handled efficiently and expeditiously 
and before the end of the year the public owned the 
stock and Cutten, Sinclair and their associates pocketed 
a profit of $12,602,169.41. As a part of the operation 
they did not put up a dollar. 

In the course of the hearings before the Senate Bank- 
ing and Currency Committee the question of "wash", 
or matched, sales came up on more than one occasion. 
Tabooed as they are, both by statute and by Stock Ex- 
change regulations, "wash" sales (in which a sale is 
matched by a purchase of the same amount) were not 
infrequently employed by operators in manipulating 
markets. Whenever a pool operation comes under scru- 
tiny this piece of trickery, seems to bob up, as in the case 
of the Manhattan Electrical Supply pool, where a pair 
of irresponsible operators took a worthless stock and 
ran it up from a low of 19 (where it was undoubtedly 
over-priced) to 55 at which it was greedily absorbed 
by a deluded public. As a blind to cover up the real na- 
ture of the operation the pool manipulators maintained 
fourteen separate brokerage accounts, which were used 
so recklessly for the purpose of matching sales that the 


record submitted in court resulted in the prompt con- 
viction of both principals. 

A. W. Cutten, the Chicago wheat plunger, who had 
a hand in the Sinclair-Consolidated deal figured in many 
pool operations during the later stages of the pre-crash 
era, but none was more flagrant than the Kolster Radio 
pool. As appears from the testimony submitted to the 
Senate Banking and Currency Committee, Kolster Ra- 
dio was controlled by Rudolph Spreckles, the Sugar mag- 
nate, and a group of associates. In 1928 the company 
was in a bad way. Earnings amounted only to 20 cents 
per share and possibly that was padded. Spreckles and 
his friends decided that the time had come to get out, so 
they called in a well-known pool manipulator and rigged 
up a deal, as a part of which Cutten, L. P. Fisher, of 
the Fisher brothers, and E. F. Hutton and Company 
(who had also figured in the Sinclair-Consolidated deal) 
were generously let in. Then the Spreckles crowd op- 
tioned to the pool 250,000 shares of Kolster Radio 
stock at prices ranging from $70 to $84 per share and 
the manipulators set to work. As a first step they "cut 
in" a Wall Street publicity man for a block of stock and 
immediately the Street began to buzz with rumors. Ac- 
cording to these reports the company had developed a 
new "short wave" transmission system which promised 
to revolutionize the industry; also a new talking motion 
picture and a new aircraft beacon. (The publicity man 
was taking no chances; he was claiming everything in 
sight.) Finally it was reported that a merger was under 
way and that the company had new business in sight to 
the amount of $36,000,000. None of these rumors 
materialized but the public bit and a suspicious activity 
in the stock developed quickly. Volume mounted from 
day to day until within a period of six weeks the pool 


had sold 456,900 shares and bought back only 206,900 
shares, thus unloading the exact amount optioned from 
the Spreckles group namely, 250,000 shares. In the 
process the insiders sold their stock to the public for 
$19,200,000, not to mention some four or five millions 
in profits taken down by the pool operators. A little 
over a year later the company passed into the hands of 
receivers, the assets were sold at public sale and the 
stock was entirely wiped out. 

As a sidelight on this interesting affair, the publicity 
promoter who paved the way for the market operation 
admitted in his testimony before the Committee that he 
had received a "call" on 15,000 shares in compensation 
for his services and had taken down 7,000 shares at 84 
and 5,000 shares at 85, which had been unloaded at 
90^ , netting him a profit of $26,414.87. He also stated 
that he disposed of the balance of this "option" stock 
at a profit that brought his total compensation up to 

But this was "small potatoes" when compared with 
such a gigantic operation as the Anaconda pool, which 
involved 1,750,000 shares of stock and resulted in a 
loss of more than $150,000,000 to investors. Through- 
out the record of this complicated and disastrous opera- 
tion winds the trail of Charles E. Mitchell and the Na- 
tional City Bank which sponsored the deal in its later 
stages. The story has its beginnings some years before 
the Big Bull Market approached its peak, when John 
D. Ryan, industrial magnate, was the dominating figure 
in the Anaconda Copper Company. As a matter of 
policy the Ryan interests had been busily engaged in 
buying up the world's deposits of copper and in the 
process had acquired substantial interests in the Chile 
Copper Company, the Andes Copper Company and the 


Green-Cannanea Copper Company, all valuable prop- 
erties. Their interests in Chile amounted to fifty per 
cent. Ryan wanted the other fifty per cent but found 
that it was held in part by the Guggenheims. Neither ele- 
ment wanted a fight, so they got together quickly and 
agreed on a basis of exchange, which was determined to 
be 73/1 00 share of Anaconda for a share of Chile. These 
terms were highly favorable to the Chile stockholders, 
but neither Ryan nor the Guggenheims intended to let 
them obtain this benefit. So carefully keeping their agree- 
ment as to the exchange basis to themselves, Ryan and 
the Guggenheims formed a pool and set out to buy up 
all the Chile stock that was available, letting the Na- 
tional City Company in for a third interest at this stage, 
possibly in order to sweeten them up for more important 
uses later. Before the offer of exchange was made public 
the pool succeeded in acquiring 108,000 shares, which 
it later turned in for Anaconda stock on a basis that 
represented a profit of about a million and a quarter 

After completing this operation some two million 
shares of Chile stock were still outstanding and it became 
necessary to get this stock in at as little cost as possible, 
so the pool's operations were directed from this point 
on toward "stabilizing" the market that is, keeping the 
price of Anaconda up and the price of Chile down, so 
that the basis of the trade might seem to be an even 
one. In the end they secured 98}^ per cent of all out- 
standing stock and thus Anaconda was enabled to swal- 
low Chile Copper on its own terms. 

But this was only a curtain raiser. By the same meth- 
ods the Anaconda crowd were able to absorb the Andes 
Copper Company (in which they originally held a fifty 
per cent interest) and the Green-Cannanea Copper 


Company (in which they had held only a twelve per 
cent interest). With these vast new acquisitions the 
stage was now set for a gigantic unloading operation, 
for through these absorptions the insiders and their 
friends had secured enormous holdings of Anaconda 
and had to find a way to cash in. Enter Mr. Mitchell. 
John D. Ryan was a director of the National City 
Bank and Percy Rockefeller, also a director of Na- 
tional City, was heavily interested in Anaconda. Mit- 
chell was to be their Man Friday, for the job ahead 
was too large to be handled solely as a market opera- 
tion. It required the entire efforts of the high-pressure 
selling organization which the bank's affiliate, the Na- 
tional City Company, had built up under Mitchell's 
direction. The market, of course, was not to be over- 
looked. It was constantly manipulated, so as to make it 
easier for the selling organization. The public likes to 
buy on a rising market. They got it in Anaconda. There 
was real teamwork. Merely as a preliminary, the div- 
idend rate of Anaconda was increased, in three succes- 
sive raises, from $3 to $7, while, it may be added, 
earnings dropped from $4.74 per share to $3.37 per 
share. As an incident of the operation a separate pool 
was formed on the side to boost the commodity price of 
copper from 18 cents to 24 cents which it promptly 
did thereby making it appear that the company's 
operations would be conducted at an increasing profit. 
All was now set for the big play and Mitchell gave it all 
that he had. Backed by the prestige of the National 
City Bank Mitchell's stock-selling emissaries carried the 
gospel of Anaconda into every city and hamlet that 
could be reached by train, automobile or dogsled, while 
Anaconda steadily moved up on the ticker 120 122 
125128130135. Within the space of a year 


it had already moved up from 53% to 120. During 
1933 the same stock hit a low of 3y 2 . All told the in- 
siders cashed in to the tune of $225,000,000 in round 
figures and investors took a loss somewhat in excess of 
$150,000,000. A fine day's work for Mr. Mitchell. 

It was such unholy combinations between the pool 
operator, or as frequently the promoter, otherwise 
known as the investment banker, and the big banks, 
conducted under the mantle of the Stock Exchange that 
has done most to bring Wall Street into disrepute. 
Taken together these three elements form a triumvirate 
that dominates the Street. The investment banker, or 
his alternate, the pool operator, or promoter, provides 
the merchandise ; the big banks furnish the credit and 
often in the old days through their affiliates the ma- 
chinery of distribution , and the Stock Exchange con- 
tributes the window dressing that makes the issues 
floated in the Street palatable to the investing public. 
Consisting mainly of market rigging, this window dress- 
ing affords the lure of advancing prices which tempts 
the unwary investor to turn his money over to Wall 
Street in return for highly decorated and often value- 
less bits of paper. 

As a case in point, take the General Theatres Equip- 
ment financing which is described in detail elsewhere in 
these pages. As a part of this involved operation the 
company authorized an offering of some $30,000,000 
of securities, backed by assets that had been cold blood- 
edly written up in value (with the full knowledge of the 
promoters but, of course, without the knowledge of the 
prospective investor) a mere matter of $38,000,000. 
The issue was underwritten by a so-called "banking 
group" headed by the Chase Securities Corporation 
in the center of which stood the familiar Shermar Cor- 


poration owned by the estimable Mr. Wiggin, (head of 
the bank). But, it appears from the evidence submitted 
to the Senate Banking and Currency Committee, the 
underwriters took pains to risk none of their own dol- 
lars in the deal. When the day for settlement arrived 
they simply turned over the securities in question to the 
Chase National Bank, against which they received a 
loan to the amount of the underwriting and out of 
this credit they made settlement with the Company. 
Before doing so, however, the underwriters had thought- 
fully put together a syndicate of banking houses 
which parcelled out the issue among themselves for 
the purpose of distribution to the public, and this 
syndicate was likewise taking no chances. Again the 
Chase National Bank obligingly placed the funds of its 
depositors at the disposal of the bankers and against the 
securities as collateral, loaned each syndicate member 
his proportionate share of the purchase price, at the 
same time cancelling the loan to the original under- 
writers and letting them out with their profit. The syn- 
dicate then formed a trading account, otherwise desig- 
nated as a pool, and under manipulation the securities 
became very active on the Stock Exchange, with the 
result that within a few short weeks the public owned 
the securities, the syndicate loans were paid off and the 
bankers were made happy with a profit of some two and 
a half million dollars. 

Upon completing this neat piece of business the Chase 
crowd were so pleased with their part in the deal that 
they undertook to duplicate the transaction on several 
later occasions, the bank always holding the bag and 
becoming involved in the long run to the extent of some 
$118,000,000, on which it took a loss of $69,000,000 
in round figures. But, be it noted, notwithstanding this 


loss, Mr. Wiggin's favored Shermar Corporation took 
down a profit that ran up into the millions. As for the 
investors who bought the debentures in question at 99 y 2 , 
they still have them and they are quoted somewhere 
around 8, the water having been squeezed out of in- 
flated assets and the corporation finally landing in re- 

This is a typical instance of high financing as con- 
ceived and carried out by the biggest and most influen- 
tial bank in Wall Street. The main cog in the wheel was 
the bank itself, which supplied the credit to carry the 
operation through. The Stock Exchange, of which some 
of the underwriters and syndicate participants were 
members, aided and abetted the undertaking by permit- 
ting the maintenance of a fictitious market and the in- 
vestment bankers (in this instance, the bank's security 
affiliate) hatched the scheme and got away with the 
gravy. The fact that two of the banking houses involved 
were caught in later financing of the same kind and 
forced to close their doors was some measure of retribu- 
tion but not enough, it will be admitted, to compensate 
the deluded investor for the loss of his hard-earned 

In common with many other abnormalities of the 
pre-crash era the security affiliates have been dealt out 
of the game under the New Deal. It will be interesting 
to see in what form they will attempt to clamber back 
and perpetuate themselves. 

Like the Stock Market, its little brother, the invest- 
ment banking or underwriting business, thrives only in 
"boom" times, when the public appetite for profits can 
be whipped up to inordinate dimensions. That the get- 
rich-quick, or gambling, instinct is deep-seated in the 
average American goes without saying. Perhaps a 


throwback to the spirit of adventure that led the early 
pioneers to risk their all in opening up and peopling the 
continent, it breaks out in many forms, from poker- 
playing to horse-racing, but this is no justification for 
an organized effort to prey upon this national weakness 
such as existed in Wall Street during pre-Rooseveltian 
days and was deliberately fostered by the banking in- 
terests which controlled the sources of credit. Periodi- 
cally, with their connivance, the ignorant or bewildered 
trader or investor or speculator call him what you 
will was let in for a "sleighride" that landed him a 
helpless cripple in a snowbank at the foot of the hill. 
And the vehicle that was used for this purpose was that 
respectable, sacrosanct and impeccable institution, the 
Stock Exchange. 



FROM time immemorial Wall Street has been com- 
mitted to the Cyclical Theory. According to this theory 
the volume of trade rises and falls in regular cycles, 
which can be determined with a fair degree of accuracy, 
and this in turn is reflected in the market. Broadly speak- 
ing these cycles assume three forms (A) the Major 
Cycle, covering a period roughly of thirty years, during 
which commodity prices and the volume of business 
moves either upward or downward, one movement suc- 
ceeding the other, as from the early seventies to the late 
nineties, when the trend was downward, and from the 
turn of the century to 1930, when the trend was up- 
ward; (B) the Minor Cycle, running from eight to 
eleven years, during which there is a well-defined trend 
within the Major Cycle, and finally (C) the Short 
Term Cycle, ranging from 20 to 24 months, when there 
is a sharper movement of the same general character. 
If the course of business is charted over a period of 
time it will disclose a continual rise and fall, correspond- 
ing to the Short Term Cycle and alternating like pulse- 
beats, on a gradually ascending or descending line, within 
the Minor Cycle, which in itself is part of a broader 
trend that is either upward or downward the Major 
Cycle. The movement with which we are most familiar 


is the eight-to-eleven year Minor Cycle, since it is these 
fluctuations that have a visible effect on national well- 
being and either create or retard prosperity. During 
the long thirty-year cycles there are recurring periods 
of good times and bad times, as evidenced by departure 
from the mean line. 

From the standpoint of economics this phenomenon 
is explained by various factors variations in national 
income, wage rates, money rates, supply of credit, pub- 
lic confidence and availability of capital. In practise it 
appears that as business emerges from a downward 
cycle commodity prices, wage rates and production costs 
are low. This induces the investment of capital, which 
increases employment and builds up production. Increas- 
ing employment adds to purchasing power, with the 
result that enlarged production is absorbed and manu- 
facturing profits accrue, and this leads to increased ex- 
penditures for capital goods. The growing demand for 
labor and materials tends to shoot prices upward, which 
further increases purchasing power, and as the national 
income increases bank deposits grow, credit becomes 
easier to obtain, money is more plentiful, business ven- 
tures are stimulated, speculation is encouraged and 
stocks rise in value. This is prosperity. 

In the course of time these tendencies are accentuated 
with constantly increasing emphasis on speculation. 
Caution is disregarded, banks become less strict in their 
loan requirements, market operations increase in vol- 
ume, the standard of living moves up these are 
"boom" times. 

But periods of over-expansion bring their own cor- 
rectives. As these various factors get out of line trade 
slackens, markets tend to weaken, stocks are likely to 
collapse, bankers show concern, credit tightens up and 


panic often ensues. The process of readjustment is 
generally short and drastic. Values descend much more 
rapidly than they rise. As credit is withdrawn whole- 
sale liquidation occurs, money is hoarded, collections 
are bad, business finds it hard to secure funds, the vol- 
ume of trade dries up. Finally prices reach a level where 
they again offer an inducement to purchasers and the 
cycle is started upward again. 

This is the usual course of the Minor Cycle. Bear 
in mind that this process is constantly repeating itself 
within the scope of the Major Cycle. Thus since 1900 
there have been four such movements, all easily dis- 
tinguishable on the charts, reaching a climax in 1907, 
1914, 1921 and 1929. Notwithstanding these cyclical 
adjustments, during all of this period the mean level 
of business, or prosperity, was ascending. Each cycle 
started from a higher level than the previous one, result- 
ing in a long-term improvement in conditions. Prior to 
1900 the trend had been in the opposite direction, with 
such Minor Cycles coming to a head in 1873, 1884 and 
1893. During this period the general trend of com- 
modity prices, wages and money rates was downward. 

Since the middle of the last century the theory of 
business cycles has been accepted with as little question 
as the Ten Commandments. It has been a fixed prin- 
ciple in both business and economics and to doubt the 
soundness of the theory was bad form. That is, until the 
Coolidge-Hoover era got under way, when a new theory, 
born of the inflation propaganda racket, began to be 
noised about in business and stock market circles. Be- 
hind it was the prestige of a new school of economists 
who based their conclusions on the premise that industry 
was entering a new era in which the time-proven tenets 
of the past could be disregarded and discarded. Accord- 


ing to this new philosophy industry had perfected a new 
technique which was to result in a prosperity that was to 
have no end. "Down with the cyclical theory" they said, 
"A new order of business and a new plateau of values 
in the stock market has been created. Panics and depres- 
sions are a thing of the past." To put it in Mr. Hoover's 
way, there was to be a permanent job for every man and 
poverty was to be abolished from the earth. 

In a way the new theory revolved around a wheel 
within a wheel, or a series of wheels within wheels. Over 
a period it held that mass production, coupled with 
efficiency methods, had reduced costs to a point where 
wages could be increased, thereby affording added pur- 
chasing power for the absorption of larger quantities 
of goods. True, the machine had resulted in a certain 
amount of technological unemployment, but modern 
merchandising methods had increased consumption to 
a point where an enlarged demand would take up this 
slack. To avoid any possibility of slip-up a vast new 
market had been opened up through the time-payment 
system of buying or was it selling? Here is where the 
benefits of inflation were to make themselves felt. The 
dusky gentleman in the woodpile. 

If one was inclined to doubt the soundness of this 
theory he was invited to look about him. On the surface 
at least there were evidences of abundant prosperity 
on every hand. Every family owned its motor car and 
its radio twin apostles of the New Era. In many 
garages there were two motor cars, in many homes a 
radio in every room and television was just around the 
corner. Electricity had made over the home. The woman 
of the house cooked, washed and ironed, swept and 
dusted, cooled and heated the temperature, kept track 
of the passing hours and generally ordered domestic 


life by electric current. On the library table were books 
that told of the marvels of this scientific age the Elec- 
tric Age, which was to succeed the Age of Steel as steel 
had succeeded bronze and bronze had succeeded stone 
this age in which physics and chemistry were mak- 
ing over life to fit a new pattern. In the morning news- 
paper one read of skyscrapers that were to reach up into 
the blue a hundred stories or more, of engineering 
achievements, dams and bridges and tunnels, that 
eclipsed the Seven Wonders of the World, of stream- 
lined trains that would travel 110 miles an hour, of fifty 
and sixty-passenger aeroplanes, of zeppelins that were 
to ply their course over the seven seas and bring London 
nearer to New York than Chicago, of "Lone Eagles" 
who dared to fly the Atlantic and brave soldiers of sci- 
ence who gave their lives that mankind might enjoy a 
more abundant existence, of new discoveries in medicine 
and dietetics, synthetic foods and cures for diabetes, 
spinal meningitis and what-not that baffled belief and 
always stocks were going up, up, UP, until a certain day 
in October, 1929, when the market crashed and carried 
the New Era philosophy down with it into a bottomless 

In other "boom" periods there has always been an 
organized body of opinion that was founded on over- 
confidence. In fact, the essence of any "boom" is an un- 
bounded faith in values that are unwarranted, but this 
was the first time in all history when such a state of mind 
was raised to the dignity of a scientific formula. But the 
theory was plausible. If one chose to look about him on 
any clear morning during 1928 or the early part of 
1929 it was not difficult to convince oneself that he lived 
in a brave new world that was to be a world without end. 


Had not the new President master mind of all the 
ages said so? 

For, regardless of weaknesses in the structure, there 
was no lack of evidence to support this belief. As it 
happened, too, the form of prosperity that we enjoyed 
was doubly visible on the surface. It was a glamorous 
prosperity that revolved around us and caught us up in 
its sweep. It filled the streets with motor cars and the 
home with color and comfort. It gave us joy and enter- 
tainment within the home and excitement without 
million-dollar prize fights, seventy and eighty-thousand 
football crowds and jazz-crazed speak-easies. It led us 
to buy fur coats and diamond rings and motorboats and 
raised the standard of living of small business men and 
junior executives who had not been accustomed to the 
good things of life to a point where they became every- 
day necessities. 

Economically speaking, the forces that were respon- 
sible for this sudden uplift were mass production and 
mass merchandising, the one being the corollary of the 
other. For the one Henry Ford is deserving of credit 
Henry Ford plus the war, which finished the job that 
Ford began. High wages, low unit costs, small profits 
were its ingredients. But this prescription called for 
volume and volume meant sales. Followed broad-scale 
advertising, high-pressure selling, intensive cultivation 
of markets, the development of installment selling 
in a word, mass merchandising. According to the new 
philosophy this combination of effort and ideas created 
a perfect circle and on it we had built a new world 
certainly a new economic era, on the strength of which 
Wall Street at least lost its head and the excesses of the 
pre-crash period were laid. 

That there were flaws in the scheme was not immedi- 


ately apparent. In the valiant mood which the world 
put on at that time it was not disposed to look for flaws. 
But, notwithstanding this, it was true that low-unit 
costs of production were in danger of being offset by 
high costs of distribution, in which case a slice was likely 
to come out of profits. Likewise high-pressure merchan- 
dising in the long run could not fail to result in over- 
hauling that mythical saturation point which sooner or 
later threatens the distribution of any given product. 
True, some bright mind in the mass merchandising 
group developed the obsolescence idea to a degree which 
definitely postponed the exhaustion of markets by ring- 
ing in style changes from year to year, but in the course 
of time the issue still had to be met. Unfortunately it 
made itself felt first in the industry which had been 
the keystone of the whole structure of the new economic 
era, for automobile sales gave unmistakable signs of 
having reached the saturation point during the Summer 
of 1929. Doubtless the consuming public as a whole 
was fed up with the never-ending chase for its dollar 
which went on in every line and it was in a state of mind 
to lay off, for a while at least. At all events business 
began to slow down and as sales dried up in volume 
inventories piled up in factories and the manufacturer 
had something to worry about. Evidently the new- 
economic-era theory was not self-propelling. It worked 
so long as consumption was maintained at top speed and 
when it became necessary to pump additional oxygen into 
the structure the tank was dry or perhaps the balloon 
was already so inflated that it burst with the first ounce 
of additional pressure. 

And So-o-o-o-o- (as the amiable Ed Wynn would 
have it) we got back to the cyclical theory or had it 
thrust back upon us, for suddenly we awoke to find our- 

selves in the grip of a panic which was identical in its 
outward aspects with similar panics that had marked 
the turn of the cycle in previous times. 

Wall Street and Big Business were both loath to 
admit it. Courageously and with the blessing of the 
President they shut their eyes to the facts and still clung 
to their satisfying philosophy until it was drowned out 
in the backwash of the Depression which followed the 
Big Break right on schedule. No longer is any voice 
raised in behalf of the New Economic Era or its philos- 
ophy. The good old Cyclical theory is back in the saddle, 
firmly intrenched by the logic of events which passes for 

Fundamentally the weakness of the new philosophy 
was that it was based upon the continual output of goods 
in unlimited supply while it took no cognizance of the 
fact that this called for the maintenance of an unlimited 
demand or bridged the chasm with broad assumptions 
that the natural growth of population would be enough 
in itself to keep consumption in step with production. 
Likewise it made no allowance for the fact that mass 
production tends to create output out of proportion to 
purchasing power. That is, the wages that it gives rise 
to are not sufficient to buy the equivalent of output in 
other goods. This tends inevitably to throw production 
and consumption out of balance and the big economic 
problem of the future unquestionably is how to get them 
into balance again and keep them there. 


DURING the later stages of the Big Bull Market, 
when fatuous souls still clung to the idea that the New 
Economic Era was to have no end, certain u big-wigs" in 
the Street got the notion that they could corner the film 
industry. The idea was implanted in their covetous 
minds by a wily promoter from Chicago who had laid 
out a program for the absorption of a group of manu- 
facturers of cameras and other motion-picture equip- 
ment. Later to be launched as the General Theatres 
Equipment Corporation, the project embraced four 
main units and was financed by a syndicate headed by 
the security affiliate of the Chase National Bank, whose 
head, Albert H. Wiggin, occupied a strategic position 
in the center of the picture. Wiggin's direct interest was 
represented by the Shermar Corporation, a family- 
owned, tax-dodging instrument which acquired a fifty 
per cent interest in the profits of the Chase Securities 
Corporation and made millions out of the operation 
while the bank and its affiliate sustained a terrific loss. 
As a preliminary step the Chicago promoter, Harley 
L. Clarke, had merged the operating companies in the 
group into the International Projector Corporation, 
marking up its assets some $12,000,000 in the process. 
Having taken this step, 1,000,000 shares of common 



stock of the new company were turned over to the Gen- 
eral Theatres Equipment Corporation, which had been 
formed for this purpose, at a further markup of $26,- 
000,000, making a total promoters' profit of $38,000,- 
000. At the time that the deal was consummated the 
common stock of the International Projector Corpora- 
tion had a book value of $2.22 per share and was earn- 
ing about 73 cents per share. It was put into the General 
Theatres Equipment Corporation at $28.50 per share, 
all of which was well known to Mr. Wiggin and his 

The crowd that had rigged up this deal had big ideas 
and accordingly the General Theatres Equipment Cor- 
poration was liberally capitalized, with 2,000,000 shares 
of $3 Preferred stock and .4,000, 000 shares of common 
stock, in addition to which some $30,000,000 of deben- 
tures were put out over a period of time. A considerable 
part of these securities got no further than the Chase 
National Bank, which contributed $89,330,147 in the 
form of loans to various syndicates handling the financ- 
ing of the short-lived enterprise, on which the Bank 
ultimately took a loss of $69,572,180, while Mr. Wig- 
gin's privately owned Shermar Corporation realized a 
profit of approximately $ 1 0,000,000. Altogether $117,- 
718,750 was poured into the treasury of the ill-fated 

In a frenzied effort to build up promoter's and syn- 
dicate profits, before the project was fairly launched 
Wiggin, Clarke and their satellites put the company into 
a venture which was to have disastrous consequences. 
Wm. Fox, the film man, was in trouble. Owning a con- 
trolling interest in the Fox Film Company and its affili- 
ated enterprises, he had become involved in bank loans 
which had him in a precarious position toward the end 


of 1929. According to Fox, the General Theatres 
Equipment Corporation, with the aid of the banks in 
question, now set out to deprive him of his properties. 
Off and on Fox had been in negotiation with Clarke 
for the sale of his properties and a figure of $55,000,000 
had been discussed. But the negotiations had lapsed 
and in the meantime Fox had found an opportunity to 
acquire control of Loew's, Inc. Marcus Loew had died 
and his estate held a large minority interest in the cor- 
poration. Fox learned that this stock could be bought 
for the sum of $50,000,000 and after consulting with 
his bankers, Halsey, Stuart and Company (who had also 
figured prominently in Insull financing), he made ar- 
rangements to acquire it. In order to finance the trans- 
action temporarily he obtained $15,000,000 from Wes- 
tern Electric interests and secured the remainder partly 
through Halsey, Stuart and Company and partly out of 
the treasuries of his companies. Within a few days after 
the transaction was completed the bankers became 
alarmed over the fact that the stock did not represent 
complete control and insisted on his buying enough in 
addition to give him at least fifty per cent of the com- 
pany's outstanding shares. On their advice Fox bought 
260,000 additional shares on the open market at a 
cost of $23,000,000, giving him 660,000 shares alto- 
gether, which had cost a gross sum of $73,000,000. 
Following this a question was raised by the Department 
of Justice in Washington, (at the instigation of his 
enemies, Fox claims) in regard to the legality of his 
control of the company under the anti-trust law and Fox 
was unable to go ahead with arrangements for refinanc- 
ing the joint transactions. There was a delay of some 
months, during which he became more or less embar- 
rassed financially, partly by reason of the fact that his 


bankers had also induced him to acquire control of the 
Gaumont Company, of England, and this had cost him 
another $20,000,000, making $93,000,000 all told 
which was tied up. In order to ease his situation he did 
some temporary financing, which put him further in 
debt to the banks and also tied up his Loew's stock as 

In the meantime the crash in the market had occurred 
and between supporting his companies' stocks in the 
market and carrying his loans, Fox was hard pressed. 
Finding it impossible to get further help from his banks, 
he went to Clarke and explained his situation but Clarke 
refused to do anything. At this juncture one of his notes 
fell due at a New York bank and when he asked for an 
extension the bank refused and seized his firm's balance. 
Other banks took the same steps, in some cases seizing 
his balances before maturities, according to Fox, and be- 
fore he could turn around he was on the verge of receiv- 
ership. In order to keep the situation in hand he was 
forced to place his stock in a voting trust. 

At this point a representative of Clarke turned up 
and offered to relieve him of his troubles but the terms 
were such as Fox could not agree to. Fox then sold a 
block of his Loew's stock to the Eastman Kodak Conv 
pany and this kept the bankers from selling out his 
entire Loew's holdings as they had threatened to do on 
the ground that they were "undercollateralized." But 
his position was still critical when Clarke himself ar- 
rived the next day. After some dickering, under pressure 
from the banks and the voting trustees who held his 
stock, according to Fox, he finally sold out his interests 
to General Theatres Equipment Corporation for the 
sum of $15,000,000, with certain perquisites on the 
side which brought the total consideration up to $21,- 


000,000. Fox contended that he sold "under duress" 
from the banks, which were headed by Wiggin who, of 
course, was heavily interested in General Theatres. 

But, whatever the real facts may be in this respect, 
the transaction ultimately broke the back of the General 
Theatres Equipment Corporation, for the burden of 
financing the deal was more than it was able to stand 
and in due course the company went into receivership. 
Most of the loss was taken by the Chase National Bank 
but Wiggin's Shermar Corporation got out with a fat 
profit. It was a case of "heads I win, tails you lose." 
The bank took the grief and Wiggin got the gravy. 

Just to what extent the Wall Street banking structure 
is honeycombed with inside profit arrangements such as 
Wiggin's it is impossible to say, but between bonuses 
such as Mitchell and his fellow-officers drew, hidden 
syndicate profits and other equally dubious "cut-ins" 
which many enjoyed, it is safe to say that none of the 
bankers went hungry during the pre-crash era. 

The question of "gravy" came up rather pointedly 
during the examination of Murray W. Dodge, vice- 
president of the Chase Securities Corporation, before 
the Senate Banking and Currency Committee in connec- 
tion with the Fox deal. Following the acquisition of the 
Fox Film Company by the General Theatres Equipment 
Corporation there had been quite a struggle between 
rival bankers to get. in on this business, for the film 
company appeared to be a "pick-up" at the price paid. 
Halsey, Stuart and Company had been the original 
bankers and it is not considered good form in the Street 
to upset arrangements of this sort. Once having origi- 
nated a piece of business and taken the risk involved, 
according to the unwritten law of the Street, a banker 
is entitled to a continuing interest, but the Chase crowd 


were not averse to getting around this "gentlemen's 
understanding" if it could be done without embarrass- 
ment. The bankers sensed this and Harold L. Stuart, 
of Halsey, Stuart and Company went so far as to tell 
Clarke that he "had been put out on end of a spring- 
board and told to jump off". But that was not to be. 
After all, the Chase people were gentlemen and they 
let Mr. Stuart in to the extent of awarding his firm a 
syndicate participation of 133,500 shares of GTE and 
250,000 shares of Fox Film as part of the financing 
required to clean up the Fox deal. 

This was not done without some qualms of conscience, 
however, as a result of which Mr. Dodge wrote a con- 
fidential memorandum to the Big Boss, Mr. Wiggin, 
containing these illuminating lines : 

"With Halsey Stuart and Company out, it is possible 
for me to discuss the whole financing with Kuhn, Loeb 
and Company again, a thing that I am loath to do, as 
the split-up of the gravy would hurt my feelings". 

Later this memorandum came to light during the 
Senate Committee investigation, when Mr. Pecora who 
was conducting the examination of Mr. Dodge sug- 
gested blandly : 

"Bankers frequently quarrel among themselves about 
a choice piece of financing business, do they not?" 

"Bankers are human, like everybody else," the wit- 
ness retorted. "And", said Mr. Pecora, "there are 
controversies about the division of the gravy represent- 
ing the split on an issue?" 

Mr. Dodge appeared not to understand the reference 
to gravy, whereupon Mr. Pecora produced the memo- 

"I would say that you had one on me", assented Mr. 


But, after all, the aggrieved bankers in this case, 
Halsey, Stuart and Company, had no complaint to make, 
since they drew down a profit of $3 1 6,2 1 5.02 from their 
participation in Fox financing. Evidently some of the 
gravy spattered over and landed on the mantle of re- 
spectability with which the world of high finance sur- 
rounds itself. 

If the question is asked: "What's the matter with 
Wall Street?", a concrete and convincing answer may 
be found in the devious record of this piece of financing. 
Conceived by irresponsible promoters and accepted in 
its entirety, with full knowledge of the duplicity in- 
volved, by the biggest bank in the Street, whose head 
was declared in on the u gravy" in return, it is alleged, 
for the financial support of his institution and the re- 
spectability which its name lent to the undertaking, it 
represented a bold and shameless scheme to clean up 
some easy millions at the expense of credulous investors. 
So long as Wall Street lends its support to schemes of 
this character it cannot hope to regain the confidence 
that it has lost. Likewise its example in this instance 
has resulted in a general let-down in banking standards 
throughout the country, as in Cleveland and Detroit 
where great banking institutions have been callously 
wrecked by practises that were similar in principle if 
not in kind. 

But to return to Mr. Fox: If this astute and much- 
abused little man had given as much attention to his 
business as he did to the stock market it is possible that 
he would not have got into the hands of the banks. Hav- 
ing built up a concern of staggering size and importance 
in its field, he used it mainly as a market adjunct. During 
the Big Bull Market Fox developed into a pool opera- 
tor of no mean proportions and maintained twenty-two 

different brokerage accounts to handle his operations. 
As far back as 1927 a Fox Film pool netted a profit of 
almost $2,000,000 to a select group which included, in 
addition to Mr. Fox himself, the ubiquitous "Mike" 
Meehan who took down $215,306.92 as his part of the 
deal. Only 50,000 shares were involved in this operation 
but somewhat later a 500,000 share pool was organized 
in the same stock with correspondingly greater profits. 
Due perhaps to its genii-like rise to affluence and to 
the atmosphere of easy money that surrounds it, the 
film industry has always held a fascination for pool op- 
erators, but no operation has been disclosed which equals 
in sheer audacity the Warner Brothers pool of 1930. 
During its early stages this company had had hard sled- 
ding and there had been little opportunity for the in- 
siders to pick up loose change through stock manipula- 
tion, but in 1928 and 1929 the company's condition 
showed considerable improvement. During the earlier 
year the company absorbed the Stanley Company of 
America, owning a chain of 200 theatres and for the 
fiscal year ending August 1, 1928, showed a balance on 
the right side of the ledger. At the end of the following 
fiscal year earnings were in excess of $17,000,000 and 
the management took cognizance of this by declaring a 
100% stock dividend, which amounted to a two-for-one 
split-up. About the same time the stock was put on a cash 
dividend basis, paying 12^ cents per share for the last 
quarter of 1929. This was raised to $1.00 for the next 
quarter. Warner now reached out and acquired First 
National Pictures, a sizeable producing unit, and the 
wires began to buzz with favorable rumors about the 
company's condition sponsored (as it later appeared) 
by a paid publicity man. The stock was a sensational 
performer in the post-crash bull market, selling up to 


80% for the new capitalization, which was equivalent to 
160^2 for the stock before the stock dividend. In 1927 
the old stock had sold at 33 ft. The stock paid another 
$1.00 quarterly dividend and according to reports it 
looked as if another melon was in sight. Then without a 
word of warning the directors met in August and passed 
the next dividend. It was a bolt from the blue and the 
stock took a "nose-dive/' ultimately resting somewhere 
around a dollar a share. 

What had happened? The usual thing. Dating from 
the beginning of the year the Warners had been unload- 
ing and had succeeded in handing the public practically 
every share that they owned at the top of the market. 
As soon as the stock began to reach bottom they started 
secretly to buy it back and got most of it around 15. In 
the end they bought back 412,829 shares, against 303,- 
484 shares that they had sold, thereby regaining control 
of the company and pocketing a cash profit of $5,918,- 
382.08 on the side. 

On the witness stand before the Senate Banking and 
Currency Committee Harry M. Warner, President of 
the company, who engineered the deal, found it difficult 
to justify the operation but he was very frank. He ad- 
mitted the facts, admitted also that reams of favorable 
publicity had been released while distribution was under 
way, admitted that he kept fully informed as to the finan- 
cial condition of the company but affected to be surprised 
when he learned at the August directors' meeting that 
the company was not earning its dividend. When one of 
the senators asked him if it was common practise for 
company officers to unload on the public in this manner 
he brazenly replied: U I would think that it is." 

If it be said that this is only to be expected in an in- 
dustry that is as loosely run as the film business, suppose 


we turn our attention again to the banking field, where 
we find conditions in Detroit that make these crude and 
irresponsible magnates of the film world appear almost 
sanctified by comparison. 

Under the leadership of a youthful banker (so- 
called), Robert O. Lord by name, who within a few 
years had climbed from a clerkship in a Chicago real 
estate office to financial prominence, a holding company, 
the Guardian Detroit Union Group, Inc., had acquired 
ownership of twenty-three Michigan banks, including 
the big Guardian National Bank of Commerce, of De- 
troit, which failed in February, 1933, owing its deposi- 
tors upwards of $90,000,000. Among those who were 
identified with its management were men who were 
prominent in the motor car industry, including Edsel 
Ford and a brother-in-law. In common with other bank- 
ing institutions the group had felt the pressure of steady 
withdrawals and their situation was further compli- 
cated by an excessive quantity of bad loans in addition 
to defalcations which in one instance ran up to $1,600,- 
000. The banks in the group carried large loans secured 
by collateral consisting of the holding company stock, 
which made it doubly necessary to keep up a good front. 
In order to do this it was essential to maintain dividends 
at a substantial rate and as it developed in testimony 
before the Senate Banking and Currency Committee the 
banks in the group were deliberately "milked" for this 
purpose, in the language of Mr. Pecora, counsel for the 
Committee. According to the testimony Lord, the presi- 
dent issued a "request" in a form which practically 
amounted to an order to the various banks to pay divi- 
dends to the holding company when it appeared that 
earnings did not justify their payment. In nearly identi- 


cal form letters Lord requested the subsidiary banks to 
do this in one such instance as follows : 

"To provide for the dividend requirements of the 
Guardian Detroit Union Group, Inc., on the basis of 
an annual disbursement of $3.20 per share a dividend 
should be declared at the June meeting of your Board 
of Directors. I would suggest that it would be in order 
for your Board to declare a quarterly dividend equal 
to 20% annually. Please be good enough to promptly 
confirm this arrangement.'* 

To this the Bank in question replied: 

"As you are aware a dividend of this amount has 
not been earned. In addition to that the Trust Com- 
pany is setting up no reserve and this is not as it 
should be." 

In other words, the bank was asked to pay dividends 
which it had not earned, as the law requires, and prop- 
erly objected. But none the less the dividend was paid. 

Not satisfied with dressing up its windows through 
the payment of unearned dividends, the Group sought 
to make its members' statements look more presentable 
by wiping out their "bills payable" items. In order to 
do this various banks in the group a few days before 
statement date exchanged certificates of deposit for 
the amount of such "bills payable", thereby getting rid 
of the ugly items. Shortly after statement date the 
certificates of deposit were cancelled and the "bills pay- 
able" went back on the books, but the public only saw 
the published statements and hence no one was the wiser, 
but a check-up revealed the fact that the bank's state- 
ments to stockholders and depositors were not in accord 
with their statements to the Michigan Securities Com- 


mission, where these items could not be covered up, and 
the "fat was in the fire." 

Notwithstanding these frantic efforts to hide its real 
condition, the net gradually tightened around the Group 
and in a last desperate effort to stave off disaster the 
directors tossed into the pot some $27,000,000 out of 
their own pockets but even this was of no avail, for the 
Group finally went to the wall owing $350,000,000 to 
400,000 depositors. Incidentally the steadily weakening 
condition of these banks led to the Michigan "Banking 
Holiday," which in turn was responsible for the banking 
crisis that faced President Roosevelt in his first days in 

u The mills of the gods grind slowly, it is said, "but 
they grind exceeding fine" and in this instance fourteen 
of the respectable bank wreckers of Detroit found 
themselves under indictment a year or so after these 
conditions came to light. 


LIKE ALL GAUL, which was divided into three parts, 
(according to the Caesar of our second-year Latin) 
the control of power in America has tended to fall into 
the hands of three groups, which have practically di- 
vided up the nation's electrical resources. In the East 
the Morgan-Bonbright interests have come to dominate 
through control of Niagara-Hudson, Commonwealth- 
Southern, United Gas Improvement and the great hold- 
ing company which finally came to absorb their other 
interests, the United Corporation. In the West the 
Byllesby interests control the Coast through Standard 
Gas and Electric and affiliated companies, with ramifica- 
tions extending far to the east, and in the central section 
the North American Company and allied interests hold 
the upper hand, though by a narrower margin. In be- 
tween and overlapping these empires at points lie the 
quondam principality of Samuel Insull and Middle- 
West Utilities, which once threatened to dominate the 
nation but now is sadly defunct, the broad realm of 
Henry L. Doherty and Cities Service, (more of an oil 
than a power property), and the sprawling octopus of 
H. C. Hopson, Associated Gas and Electric. Closely 
allied with the Morgan-Bonbright group is Electric 
Bond and Share, which reaches out for world control 



through ownership of a dominating interest in Amer- 
ican and Foreign Power, with properties in thirteen 
foreign countries and assets of half a billion dollars or 

This concentration of control is strictly in line with 
the general trend of industry and on the whole it has 
been a natural development, for in the power field, more 
than any other, economy and efficiency can be obtained 
by volume. But at the same time it raises the question, 
which has often been raised before : Is there a Power 
Trust? or, to put it more exactly, was there a Power 
Trust, for the market collapse and the ensuing depres- 
sion have played havoc with the alignments of earlier 
years. According to the power interests, the Power Trust 
is a myth and, so far as control by any single interest or 
group of interests approaches the point of monopoly, 
the weight of evidence seems to be on their side. But it 
is also not to be denied that the leading interests in the 
industry have been working toward the creation of one 
vast system which will control the entire production and 
distribution of power on the North American continent 
and one or another of the existing groups hopes to be 
the nucleus around which this great system will be 
formed. If there is any doubt of this purpose, read what 
Guy E. Tripp, Chairman of the Board of the Westing- 
house Electric and Manufacturing Company, wrote in 
a book published over his name, Super-power As an Aid 
to Progress. 

"Some day if the people of the United States and 
Canada desire it", he says, "a single 'super-power' sys- 
tem will furnish electric current to the greater part of 
the North American continent", and adds further on, in 
elaboration of this thought : "By means of a single super- 
power system, extending from ocean to ocean and receiv- 


ing power from every waterfall, from the waste prod- 
ucts of industry and from all other economical sources, 
including huge steam plants of the most efficient type 
placed in the coal regions and other favorable locations, 
we shall be able to distribute the maximum of power 
obtainable from our resources to the largest number of 
people at the lowest possible cost." 

Elsewhere he states that "This system is being de- 
veloped more rapidly than most people are aware. Be- 
cause of the economic and technical advantages of large 
systems, the present tendency in the electric light and 
power industry is to consolidate or interconnect adjacent 
systems; and as a result, super-power systems of con- 
siderable size have already been formed along the Pa- 
cific Coast, in the South-eastern states, New England 
and the North-West. Others are in process of formation 
in Western Pennsylvania, the Middle-West and else- 
where. Continued development along these lines, includ- 
ing high-tension interconnections between adjacent 
super-power systems, will bring into being two large 
power systems, one covering the country east of the 
Mississippi and the other west of the Great Plains. 
Then, if some time in the future, transcontinental lines 
join these two systems together, the single system will 
be consummated." 

"Even complete and detailed plans for the final sys- 
tem have been prepared", he concludes. "These plans 
are the work of Mr. Frank G. Baum, a hydro-electric 
engineer of long experience, and have been made avail- 
able to the industry with the assistance of the Westing- 
house Electric and Manufacturing Company. Guided by 
these plans, or by some standardized modification of 
them, electric light and power companies in the remotest 
parts of the country can carry on new construction and 


extensions with the assurance that, when the time comes, 
their systems will be able to take their proper place in 
the single system." 

Just how far the actual development of this vast sys- 
tem has proceeded has become more apparent in recent 
years. Heretofore the facts about power control have 
not been easy to get at. They have been closely guarded 
by the power interests. But a few years ago, in 1925, 
Congress authorized an investigation of the utility 
corporations by the Federal Trade Commission and in 
the face of many obstacles created by the power people, 
the facts have gradually been dragged into the light. 
The investigation has not yet been half completed but 
it has already built up a fairly adequate picture of the 
power industry as it had been developed up to the end 
of the pre-crash era. 

Briefly, there are five facts that stand out vividly from 
the revelations of the Commission up to this time, as 
follows : 
1 A steady concentration of control, through mergers, 

consolidations and holding companies. 
2 A vast inflation of capital accounts, by means of 

write-ups in the valuation of properties. 
3 Excessive earnings on actual capital invested. 
4 Inflated valuations used as basis of extorting higher 

5 Excessive service charges reflected in increased rates. 

The outstanding fact in utility development during 
the pre-depression period was the growth in the number 
and size of the holding companies. The movement 
toward consolidation has been progressing steadily 
since the war, but in the later years of the Big Bull Mar- 
ket, when the public appetite for group investments had 
been whipped up to a frenzy, bankers and promoters 


turned with one accord to the holding company as the 
simplest and most effective means of reaching the pub- 
lic purse. They succeeded in doing so to the extent of 
some ten or twelve billion dollars and at the same time 
brought about a concentration of control within the 
industry that has gone far toward establishing the one 
vast system that the leading power interests dream of 

The extent to which holding companies have fastened 
their grip on the industry appears from the fact that as 
long ago as 1925 nineteen of the leading companies con- 
trolled 83.1 per cent of the total power output of the 
country. Of these one group of five companies con- 
trolled 46. 9 per cent; a second group of eight controlled 
22.8 per cent and a third group of seven controlled 13.6 
per cent. Since 1925 this control has been vastly ex- 
tended and unified by combinations that have brought 
together many units within the groups and added others 
that stood outside. As reported by the Federal Trade 
Commission, 3,895 such combinations occurred from 
1924 to 1929 (inclusive), involving total assets esti- 
mated as in excess of $15,000,000,000. 

From the operating standpoint it is possible that the 
holding company justifies itself, but it is a question 
whether the abuses which it has consistently fostered 
have not been more than enough to offset its advantages 
from the point of view of public policy. Thus, there is 
no doubt that the holding companies have provided 
engineering and managerial skill which the small com- 
panies could not afford; they have improved the quality 
of service and reduced operating costs through mass 
purchasing and by displacing small inefficient plants by 
large generating stations ; they have extended the scope 
of electrical service by high-tension lines and have solved 


the problem of financing for the small units. From this 
point of view the benefits of the holding company cannot 
be questioned and, it may be added in passing, their 
intricate and involved capital structures have offered un- 
limited opportunities for profit to the banker and pro- 
moter, but the interested third party, otherwise known 
as John Q. Public, has a different story to tell. Accord- 
ing to him, the public pays for these benefits and pays 
well both in excessive rates and in promoters' profits. 
From the financial standpoint the holding company 
permits a concentration of earnings in the hands of its 
common stockholders to the disadvantage of the security 
holders of the operating, or subsidiary, units, thereby 
making it possible for a favored few, generally the 
bankers or promoters, to obtain more than a just share 
of the earnings. In setting up the holding company, 
according to accepted practise, working capital of the 
operating companies is provided through the issuance 
of preferred stock or bonds, whose return is limited to 
six per cent or thereabouts, while the holding company 
acquires the equity stock (usually for a nominal con- 
sideration), and this stock derives the benefit of any 
earnings in excess of fixed interest or dividend charges. 
Net earnings may run anywhere from 8% to 15%. It is 
not uncommon to superimpose other holding companies 
upon the first, sometimes up to five or six in number, 
each layer of the pyramid being set up with similar 
capitalization of bonds or preferred stock, and the next 
holding company above in each instance holding the 
common stock and so absorbing all excess earnings over 
and above fixed charges. In this way the top company 
may derive all the profit above six per cent from a group 
of holding companies, each of which represents a large 
group of operating units and its earnings may amount to 


50% or 100% or even more on its original investment. 

To give a concrete example : earnings of the Electric 
Bond and Share Company over, a period of years, as 
reported to the Federal Trade Commission, amounted 
to 42.95 % on the original cost of its holdings and in one 
isolated case actually amounted to 3,102.62% on its 
investment in a subsidiary holding company. In another 
case they amounted to 2191%. In the same way the 
American Power and Light Company reported a return 
of 51.86% on one company, 54% on another and 96. 8% 
on another. The American Gas and Electric Company 
reported similar earnings ranging from 46% to 65%. 

From these and other similar cases the Federal Trade 
Commission concludes that earnings of 15% to 50% 
are not uncommon among the holding companies and 
they often run as high as 100% or more. Thus, it is 
evident that the holding company has afforded a medium 
of unusual profit to the promoter and his side partner, 
the banker, and while this may not be of direct concern 
to the consumer, it decidedly affects the investor who 
provides the working capital and indirectly it has a bear- 
ing on the rates charged to the consumer, as we shall 
see later. 

But the holding company has other sources of profit 
aside from the direct return on its investment. It has 
become common practise for the holding company, or 
a special subsidiary organized for this purpose, to take 
over the managerial and engineering activities of its 
operating units and the fees for these services are large, 
often showing profits ranging up to several hundred per 
cent on the actual cost of the services rendered. This 
charge, of course, becomes a burden upon operations, 
thereby affording additional leverage to obtain higher 
rates from the consumer. Likewise the holding company 


receives a fee for any financing which it undertakes on 
behalf of the subsidiary and it is the rule to capitalize 
this charge, so that the consumer ultimately finds this 
item also reflected in rates. During 1927 the income 
from these several sources reported by the Electric Bond 
and Share Company amounted to $18,513,300.85. 

From this it will be seen that the holding company 
loses no opportunity to derive a profit from the activi- 
ties of its operating units, but its chief function is still to 
be disclosed. From the testimony submitted to the 
Federal Trade Commission it is evident that the main 
advantage of the holding company lies in the opportun- 
ity it affords to write up the values of operating proper- 
ties and so to establish a constantly rising basis for fixing 
rates. Thus, it was disclosed only recently that the Cities 
Service Company had written up an original investment 
of $12,000,000 a round $100,000,000, or more than 
eight times over. At the end of 1927 the Electric Bond 
and Share Company carried investments in certain com- 
panies on its books at $20,310,516.48. The actual cost 
of these investments amounted to $9,161,109.94 and 
the balance, or $11,149,406.54, represented write-ups 
in the value of these holdings. These values were deter- 
mined in various ways through reappraisals, through 
values placed on stock dividends and values given to 
bonus stocks. During the year in question, 1927, the 
Electric Bond and Share Company effected a reorgani- 
zation, as a part of which its properties were written 
up and the total write-up amounted to $399,201,827. 

A similar instance of inflation was revealed in the 
records of the American Power and Light Company, 
which showed a write-up in the value of certain holdings 
from $55,284,426.40 to $123,725,358.16, or $68,440,- 
93 1 .76 about 1 24 per cent. An even more striking case 


came to light in the Washington Water Power Com- 
pany, which originally invested $50,000 in a small sub- 
sidiary. Within nineteen years the value of this invest- 
ment had increased on its books to $532,974.02 
without the investment of a dollar of additional capital. 

With the investigation only half completed, the Fed- 
eral Trade Commission had found records of such write- 
ups to a total amount of $925,985,795.26 on all of 
which, as Senator Norris stated in the Senate, the con- 
sumer u must pay a profit for all time not only for a 
day, not for a year, but unless some change is made by 
the proper authorities it must be paid forever." 

The real significance of such inflations of value lies 
in the fact that the power interests have been conducting 
a determined campaign to establish book values as the 
basis for fixing rates in place of actual values. The ques- 
tion of rates is, of course, the central issue in the whole 
power question. After a good deal of effort the com- 
panies succeeded in establishing the principle of a "fair 
return" as a fundamental basis for determining rates. 
This return is generally accepted as somewhere around 
8%, but the basis on which to figure the return is not so 
definitely established. In principle most of the states 
allow the actual value, or "reproduction cost new less 
depreciation", but this is not enough to satisfy the power 
companies. They have uniformly contended for book 
values, which, of course, would allow them a consider- 
ably wider margin of profit, and there is no doubt that 
these inflated values will establish a prima facie case for 
values in excess of actuality if they can gain their point. 
At the worst they give the companies ground for an ar- 
gument, which the courts are always likely to sustain. 
Likewise it is to be borne in mind that inflated valuations 
make it easy to issue securities in excess of proper re- 


quirements and the fixed charges on such securities are 
chargeable against operating expenses, thus making it 
necessary to earn a larger net return, which in turn 
affects rates. The same applies to excessive fees for 
managerial or other services, such as the holding com- 
panies are wont to charge. 

Just how much these service charges may amount to 
is indicated by the fact that income of the American Gas 
and Electric Company from such sources, from 1917 
to 1929, amounted to $16,624,526. In 1927 its profit 
from these services over and above cost was 71.6%. In 
other words, 71 cents out of every dollar was clear 
profit. In 1927 such income of the Electric Bond and 
Share Company from one of its subsidiaries alone was 
$1,633,202. According to accounting practise these 
expenses are a proper charge against operations and 
must be absorbed before calculating the "fair return" on 
which the rates are based. 

In the last analysis the question of rates comes down 
to the cost of producing and delivering power and in the 
course of its investigation the Federal Trade Commis- 
sion threw some interesting light on this subject. Accord- 
ing to the records of the Alabama Light and Power 
Company, the cost of production, after making due al- 
lowance for interest and depreciation, is .891 cent, or 
less than one cent, per kilowatt hour. Over against this, 
the average charge to domestic consumers is 5.56 cents 
and the top charge is 16 cents (80c for the first five 
kwh.), or eighteen times the actual production cost. 

Commenting on this condition, Frederick M. Sackett, 
one-time Ambassador to Germany and a power magnate 
himself, said in an address delivered before the World 
Power Conference in Berlin, in 1930: 

"In most of the great centers of population, in Amer- 


ica at least, the consumers pay for household service 
around six cents per kilowatt hour, or fifteen to twenty 
times cost" To this he added: "I know of no manufac- 
turing industry where the sale price of a product to the 
great mass of consumers is fifteen times the actual cost 
of the article sold . . . Until the power business is 
brought in line with other industries in the relationship 
of its cost of production to the price paid by the con- 
sumer of the product there can be little justification for 
the thought that this great power industry is rapidly 
approaching perfection." 

The wide disproportion between the production cost 
and the delivered price of power for domestic consump- 
tion is due in no small part to the practise which has 
become general throughout the industry of supplying 
industrial or wholesale power at a nominal rate and mak- 
ing up the loss of profit at the expense of household 
consumers. In principle it is possible that this policy is 
not unsound but there is little justification for the wide 
disparity that exists. As it is, the small domestic con- 
sumer is heavily taxed for the benefit of the large indus- 
tries, which often include other power companies or 
their subsidiaries. Thus, in the case of the Alabama 
Power Company, industrial or wholesale users pay 1.02 
cent per kwh. and residential consumers pay an average 
rate of 5.56 cents, or more than five times as much. In 
both cases a considerable part of the output is bought 
from the government plant at Muscle Shoals at a cost 
of 2 mills (.2 cent) per kwh., to which, of course, must 
be added the cost of distribution. 

As to this item, the government's engineers report 
that hydro-electric power can be developed and deliv- 
ered at the switchboard at a total cost of 1.352 mill and 
the cost delivered at 250 miles is only 2.467 mills. Note 


that these figures are expressed in mills, not in cents. 
Evidently there is ample room for profit. 

Notwithstanding the trend toward the absorption of 
municipal plants by the private companies, the chief 
bugaboo of the power industry since its inception has 
been municipal ownership. At one time this was a factor 
of no little consequence in the industry. As recently as 
1922 forty per cent of the total number of power plants 
were under municipal control, but such plants, it is to be 
noted, produced only 4.7% of the total power output. 
In explanation of this disparity we find that during the 
early days of the industry the private companies, fairly 
enough, restricted their operations to well-settled areas 
where power could be produced and sold in volume at 
the highest profit and municipal operation was seldom 
undertaken except as a last resort when power was un- 
obtainable from private companies, which resulted in 
such operations being conducted under the most un- 
favorable conditions. For this reason, coupled with the 
development of high-tension power lines, which con- 
stantly tended to reduce the cost of production for the 
larger units, the municipal plants, with some exceptions, 
have not made an impressive record and in many cases 
have sold out to the private companies as their consump- 
tion developed, leaving the municipalities in possession 
only of small plants with limited output. Nevertheless 
the industry as a whole has continued to recognize this 
threat to its dominance and has conducted a widespread 
campaign of propaganda against municipal ownership 
in any form. In some parts this has been due to several 
striking object lessons in municipal or state operation 
on a scale comparable to that of the larger private units, 
resulting in each case in lowered costs and correspond- 
ingly lower rates. 


In this country the most notable instance exists at Los 
Angeles, where the city undertook the production and 
distribution of electricity in 1916 in competition with 
privately owned companies. Through reductions in rates 
and improvements in service the city plant gradually 
drove the private companies out of the field, all except 
one selling out to the city. From the start the city estab- 
lished a rate of five cents per kwh., where it has remained 
with minor variations since, in comparison with a rate 
of 6.2 cents maintained by the companies. Notwithstand- 
ing its low scale of charges, within a period of eleven 
years the municipal plant paid off two-thirds of its 
bonded indebtedness and had a net worth of $23,000,- 
000 over all liabilities, including outstanding bonds. It 
is generally recognized that the low power rate has had 
not a little to do with the phenomenal development of 
Los Angeles as an industrial center. Aside from its bond 
indebtedness, in order to finance this project the city 
appropriated the sum of $4,736,000 from taxation, on 
which it received a return amounting to $32,000,000 in 
savings on rates during the first eleven years. Not a 
bad investment. 

If it be argued that this is an isolated instance we can 
find an even more impressive object lesson across the 
border, in Canada, where the Hydro-electric Commis- 
sion of Ontario has built up a remarkable record. The 
Commission started the delivery of power in 1910 and 
six years later it was distributing more than a million 
horsepower annually and had under construction plants 
which would provide additional horsepower of 1,300,- 
000, all of which has since been utilized. The area served 
by the Commission is not restricted to a single locality 
but covers a wide field, in which respect its operations 
are practically identical with those of privately owned 


systems. It supplies industrial users as well as domestic 
consumers and provides power at wholesale to munici- 
palities which do their own distributing, in all cases at a 
substantial saving in cost, domestic consumers paying 
on the average about two cents per kwh., or less than a 
third of the cost to customers of private companies on 
this side of the border. Incidentally, these low rates 
have brought about a vast increase in the use of elec- 
tricity in this territory, the average domestic consumer 
using 98 kwh. per month as compared with 39.36 kwh. 
in the United States. 

The Ontario experiment, no less than that of Los 
Angeles, has supplied a convenient and effective yard- 
stick with which to measure power costs as a basis of 
rate fixing and it has been a thorn in the side of the power 
interests, who have put forth elaborate efforts to destroy 
the force of this evidence, but they have found it diffi- 
cult to get away from the facts. The plain truth is that 
the Ontario Commission has succeeded in doing a public 
job with greater efficiency than private enterprise and 
so has struck a blow at the heart of the power companies' 
argument, which is based on the assumed incapacity of 
government to function effectively in the field of private 

In their efforts to justify their position the power in- 
terests never weary of citing the fact that the trend of 
rates has been downward during recent years and there 
is no doubt that this is so, but it is to be questioned 
whether the reduction in rates has been nearly sufficient 
to offset economies effected by improvements in produc- 
tion methods or by the vast increase in the volume of 
output. According to the Electrical World, operating 
expenses (not including taxes and depreciation) 
amounted to 45 % of gross revenues in 1922, to 43.8% 


in 1926 and to 43% in 1927. During this period the cost 
of producing a unit of one kilowatt dropped from 1.64 
cent to 1.42 cent, or 14%. On the other hand net operat- 
ing income per kwh. has increased from 81c to 90c, or 
11%. Admitting the downward trend of rates, it is 
necessary to recognize that production costs have like- 
wise come down and the net gain to the industry has been 

But to return to the holding companies. There is 
another angle from which the holding companies enter 
into the rate-making question. In order to escape state 
regulation power companies have adopted the practise 
of wholesaling power from one state to another and 
have sustained the position in the courts that the state 
cannot look behind the corporate entity. Thus it has 
been held that a holding company in New York may 
wholesale power to one of its subsidiaries, which is a 
separate corporate entity, in Pennsylvania and so keep 
beyond the reach of the Pennsylvania regulatory body, 
thereby obtaining practically a free hand in making 

Like the Stock Exchange, the power industry has 
fought regulation at every turn and where its efforts 
have been unavailing it has resorted to political influence 
or press control to achieve its objectives. Particularly 
in the courts its efforts have been effective. Almost with- 
out exception the courts have stood behind the power 
companies in their raids on the consumer's purse. 

Very early in its existence the power industry recog- 
nized the need of an informed and favorable public 
opinion and for this purpose has built up a propaganda 
machine which is second to none in point of effectiveness. 
The fountainhead of its activities is the National Elec- 
tric Light Association better known as Nela which 


is maintained by the power interests as a whole for the 
purpose of co-ordinating their activities and advancing 
their common interests in all fields. 1,593 power compa- 
nies are members of this association, in addition to 17,- 
331 individuals, making a total membership of 18,924. 
Financial support is derived from an elaborate system 
of fees and dues, yielding a gross revenue in excess of 
$1,000,000 per annum. Among the manifold activities 
of this organization, none makes such a demand on its 
resources as publicity, which is under the control of a 
national committee, known as the Information Bureau 
Organization Committee. This committee works 
through or co-operates with 28 state bureaus or com- 
mittees covering 38 states. Year after year the associa- 
tion releases a flood of leaflets, pamphlets, booklets, 
reprints of addresses and other propaganda for the 
purpose of influencing public opinion. This is done 
through innumerable channels, both local and national, 
and the association does not stop at the circulation of 
printed matter. It maintains lecturers and subsidizes 
writers who conduct a continuous "campaign of educa- 
tion" through newspaper and magazine publications, 
broadcasts and personal contacts. Special attention is 
devoted to schools, colleges and women's clubs and its 
influence upon the radio is obvious from the fact that 
General Electric, Westinghouse and Radio Corporation, 
which have extensive affiliations in the utility field, are 
associated in the ownership of two of the leading broad- 
casting systems, one of which is headed by a former 
publicity director of Nela. Before that a member of a 
State regulatory body, it is evident that this shining light 
of the industry sold out to the power interests lock, stock 
and barrel. 

As a part of its never-ending effort to influence public 


opinion, the association maintains two separate press 
agencies at remote points and supplies them with ample 
funds for propaganda purposes. With a constant stream 
of advertising pouring in from the utility companies, the 
newspapers have not been backward in printing these 
agencies' "canned" editorials, news and other items, 
which are invariably directed at the attainment of the 
power interests' private objectives. Thus, in one year 
alone, one of these services reported the publication of 
items aggregating 1,954,398 inches of newspaper space. 
The service was supplied (without cost, of course) to 
between 13,000 and 14,000 newspapers throughout the 

In order to give additional effect to its propaganda 
work, in recent years the industry has brought its adver- 
tising and publicity activities into line as parts of a 
broad plan to influence public opinion. Altogether this 
program involves the expenditure of upwards of $20,- 
000,000 annually for advertising and the Information 
Bureau sees that appropriations are restricted to "loyal" 
newspapers, which can be counted on to "blow their 
trumpets" in the interest of the utilities. 

But the power industry does not rely on propaganda 
alone in its efforts to control legislation: Lobbying is 
one of its chief activities and as late as the year in which 
this is written a grave scandal was disclosed in the New 
York Legislature, when it appeared from letters written 
by the Chairman of the Senate Public Service Committee 
that he was accustomed to work hand in glove with the 
power interests and had even gone so far as to accept 
money from them in payment for services and expenses. 
When the occasion demands the industry is lavish with 
appropriations for political purposes, as in California, 
where it is of record that $501,605.68 was spent in a 


statewide effort to defeat the Water and Power Act, 
which would have empowered municipalities to engage 
in municipal operation on a broader scale, the money 
coming from six companies, of which the Pacific Gas and 
Electric Company was the largest contributor, subscrib- 
ing $133,947.80. The California Edison Company ex- 
pended more than $100,000 to defeat the same act and, 
it may be noted in passing, that these efforts were not 
without success, for the bill was killed. 

In their activities either in the field of propaganda or 
of direct lobbying the power interests have two primary 
objectives: to build up their case for higher and ever 
higher rates and to destroy any manifestation of public 
ownership, wherever it may appear. Thus their forces 
were arrayed for years against both the Muscle Shoals 
and Boulder Dam projects and were responsible for 
interminable delays. They still stand in the way of 
President Roosevelt's St. Lawrence River development. 

At Muscle Shoals the question was not one of getting 
into government ownership but of getting out of a situa- 
tion in which we were already heavily involved. At the 
end of the war the government found itself in possession 
of great nitrate and power plants, representing an in- 
vestment of $150,000,000 and the question was what 
to do with them. From the standpoint of public policy, 
in view of the importance of nitrate in the manufacture 
of munitions as well as its peacetime value as fertilizer, 
it seemed necessary to keep the plants on a productive 
basis, but at that time the country was reluctant to see 
the government engage in large business undertak- 
ings and Washington sought to dispose of the prop- 
erties. Bids were entertained from various sources, 
including a proposal from Henry Ford, but all were 
rejected on account of inadequacy. In the meantime it 


came to be apparent that Muscle Shoals was probably 
the greatest single power site east of the Rockies. The 
primary installation will develop more power than is 
now developed on the American side of Niagara Falls 
and the utilization of this power will control the indus- 
trial development of the entire South, which is enor- 
mously rich in potentiality. Should we turn this natural 
resource over to private exploitation or let the govern- 
ment develop it for the benefit of the inhabitants of this 
district? That was the question. Twice Congress an- 
swered it in favor of government development and twice 
the bill was killed, once by a pocket veto of Coolidge and 
once by outright veto of Hoover. 

From the first the power interests opposed govern- 
ment operation with every resource at their command. 
They fought the project, tooth and nail, by propaganda, 
open opposition and by secret lobbying. In the end they 
came out into the daylight and showed their hand, when 
the chief power interests of the section, headed by the 
Georgia Railway and Power Company and the Alabama 
Power Company, put in a bid for the property. On the 
surface it was a plausible proposal, offering to develop 
nitrate production as well as power sources, but it was 
full of loopholes and Congress greeted the offer by again 
passing a bill for goverment operation. By this time, 
fortunately, a more liberal administration had come into 
command in Washington and under Roosevelt's in- 
fluence the bill had been broadened out into a vast 
scheme to develop the Tennessee Valley as a part of the 
program of recovery. The bill was signed, of course, and 
duly became law. 

And so, with the injection of the Georgia Power Com- 
pany and the Alabama Power Company into the situa- 
tion, we get back to Wall Street. For both of these com- 


panics are subsidiaries of Commonwealth and Southern 
Corporation, which is, in turn, a subsidiary of the United 
Corporation, which is the pet project of J. P. Morgan 
and Company who are not unknown to Wall Street. 

That the utilities played a leading part in the stock 
market debacle of 1 9 29 is a fact of such recent and poign- 
ant memory that it hardly need be dwelt upon. To cite 
the names of Middle West, Insull Investments, Cities 
Service, Central States Electric, Electric Bond and Share 
and American and Foreign Power is to conjure up a 
picture of top-heavy stock pyramids which toppled 
overnight from the dizziest heights to abysmal depths. 

Strangely, up to the period of the Big Bull Market 
the utilities were not in favor in Wall Street. With the 
exception of Consolidated Gas, Brooklyn Union and a 
few other banker-controlled street railway and power 
properties they were consigned to the province of the ir- 
responsible promoter. On more than one occasion would- 
be members of the New York Stock Exchange have been 
denied admittance on the ground of their records as 
utility promoters. But this attitude underwent a decided 
change during the later years of the bull market, when 
the utilities finally came in to their own and utility stocks 
found a place even among the u blue chips". Not soon 
will many investors forget North American, Goldman 
Sachs Trading, Shenandoah or Blue Ridge the last 
two being among the last great investment trust flota- 
tions put out before the curtain was rung down on this 
halcyon era. Put forth with greater fanfare than any 
previous offerings of these mad, wild days, they turned 
out to be merely wastebaskets for their promoters, who 
through these mediums unloaded enormous holdings of 
unmarketable stocks at the top of the market. 


FOR a year or more prior to that fateful 23rd of 
October, 1929, when stocks started their spectacular 
"nose-dive", business had been "spotty", as the trade 
journals and analysts put it, despite the general impres- 
sion of prosperity on an unprecedented scale. With the 
exception of automobiles, radios, refrigerating systems, 
various electrical devices and a group of luxuries or 
semi-luxuries, whose sales had been universally fostered 
by high-pressure merchandizing or the time-payment 
system of financing, business as a whole had not been 
all that it seemed. At its best, the so-called "Coolidge 
prosperity" of the Twenties was an elusive thing and 
lacked a sound, enduring basis. Partly the result of 
political propaganda and partly inspired by Wall Street 
"ballyhoo", it was more effervescent than real. Even at 
the so-called peak, in 1929, commercial loans of the 
Federal Reserve System amounted only to $12,814,- 
000,000, as compared with $12,844,000,000 in 1922, 
and at no time in the interim had they exceeded these 
figures, indicating that business was making no abnormal 
demands on credit. Over against this, brokers' loans had 
increased from $650,000,000 to $8,500,000,000, leav- 
ing no room for doubt as to where the country's credit 
was going. Evidently it was being absorbed by specula- 



tion in the stock market, the natural result of the infla- 
tion conspiracy which had been hatched in Wall Street 
and carried out with the aid of Washington. 

That the false activity of the stock market and the 
noisy acclaim of those who had paper profits created an 
atmosphere of prosperity, or pseudo-prosperity, there 
is no doubt, but likewise they obscured the real situation. 
As a matter of plain fact, many of the key industries of 
the country had been in a deplorable state since the close 
of the war. Chief among these were the textiles wool, 
cotton and silk leather and shoes, coal, paper and, 
above all, agriculture. In all these fields production ca- 
pacity far outran demand. A graphic instance was the 
shoe industry, which had a plant capacity of 900,000,- 
000 pairs of shoes per annum, with an actual consump- 
tion of only 300,000,000 pairs. The industry was loaded 
down with idle plants, eating up interest and overhead 
charges voraciously. To take up the slack would have 
required an increase in the consumption of shoes, even 
after making allowance for a normal export demand, 
from 2 l /2 pairs per capita annually to 5 pairs per capita, 
which was obviously out of the question. The same con- 
dition applied in a somewhat less degree in the clothing 
industry, where changing styles resulted in large profits 
for a few manufacturers and losses for many others. 
Coal had faced increasing over-production since the 
war, combined with a falling demand, due to the com- 
petition of gas, electricity and oil. But most serious of 
all in its effect on purchasing power was the depressed 
state of the farming community, where vast unexport- 
able surpluses had accumulated from year to year, re- 
sulting in a carry-over of 91 million bushels of wheat 
and 20 million bushels of corn as early as 1927. The 
meat-packing industry was in little better state, with the 


price of beef and pork both depressed, as in the case of 
other farm products. The effect of conditions in these 
important industries was to reduce purchasing power 
to an extent that was barely offset by the prosperity of 
the luxury industries. 

As the last two years of the Big Bull Market opened, 
notwithstanding the opinion generally held that stocks 
were too high, a sensational advance in prices occurred 
early in March, 1928. The market made the front pages 
of the newspapers as General Motors jumped 5^4 
points, then another 9% points, Radio 12 24 points, 
American Can 7 points, Allied Chemical 4 points and 
U. S. Steel 7 points. 

Under the impetus of buying from interests which 
had stayed out of the market up to this time prices con- 
tinued to climb steadily until May, when there was a 
spectacular break, due to a collapse in the Giannini 
group of bank stocks, which were speculative favorites 
on the Pacific Coast. Despite the banker's own warning 
that the stock of the largest bank in the group Banc- 
italy was overvalued, it had been steadily pushed up 
until the stock toppled over by its own weight and car- 
ried the rest of the group along, with losses ranging 
from 80 to 200 points. The debacle wiped out many 
speculators on the coast and had an immediate reper- 
cussion on the New York Stock Exchange where a wild 
outburst of selling caused heavy losses and, incidentally, 
resulted in the first five-million-share day. It was a break 
of no mean proportions, but the market quickly recov- 
ered and prices headed up again when the ticker brought 
the news of Hoover's nomination for the presidency, 
insuring, as it seemed, a continuation of the new eco- 
nomic era, together with the policy of credit inflation 


which was its life-blood "Four more years of prosperity" 
was the cry and it found a ready echo in the Street. 

The Hoover Bull Market got its start with the elec- 
tion in November. Late in that month Radio sold up to 
400, Montgomery- Ward to 439 J^, International Har- 
vester to 368, Wright Aeronautical to 263, U. S. Steel 
to 179 YT. and Stock Exchange seats sold at a new high 
$580,000. By this time five-million-share days had be- 
come matters of common occurrence and prices con- 
tinued to rise until December, when there was another 
collapse, due apparently to realizing sales by a group of 
large operators. For several worried days it seemed 
that the bottom had fallen out of the market, but after 
the first shock the ship righted itself again and the profit 
takers evidently reconsidered their action, for the ad- 
vance was again resumed. 

But the break had thrown a scare into the Federal 
Reserve Board and at this late date, after more than a 
year of complacency, they tried to put on the brakes. 
Obviously the remedy was a drastic raise in the redis- 
count rate, but the authorities were not equal to this 
radical measure. They feared a panic which might have 
a serious effect on business. So they compromised and 
decided instead merely to exert pressure on member 
banks to prevent reloaning of Reserve funds to brokers 
and issued a public statement to this effect. The imme- 
diate result was a temporary reaction in the market. A 
secondary result was some tightening up in credit, the 
call money rate jumping to 20% within sixty days. Under 
the stress of high money rates the market collapsed again 
and liquidation resulted in a turn-over of more than 
8,000,000 shares in a single day. Once more it looked as 
if the balloon was about to burst, but promptly a group 
of New York banks came to the rescue and set about 


pumping oxygen into the weakening structure. Thumb- 
ing his nose at the Federal Reserve, Charles E. Mitchell, 
president of the National City Bank, coolly offered to 
loan $20,000,000 at rates ranging from 15% to 20% 
and the day was saved for the bankers and brokers. As 
for the deluded public, as usual, it waited for a more 
severe lesson to bring it back to its senses. 

With call money bringing 15% or better, the big cor- 
porations now began to throw their cash surpluses into 
the stock market in increasing volume and soon the 
"Loans from others" items in the weekly bank statement 
began to assume staggering amounts. At the peak it 
reached a total of 3 J / 2 billion dollars and served to set 
at naught any tardy efforts that the Reserve authorities 
might have sought to make to control the flood of specu- 
lation that was swamping the country. 

At this point the speculative crowd took the bit in its 
teeth and rushed prices up from previous highs to new 
highs at a pace which indicated that the sky was to be 
the limit, but flurries were occurring with a frequency 
that gave some cause for alarm if there had been any to 
take alarm. As it was caution was thrown to the winds 
and throughout the summer prices rose until they 
reached the pinnacle early in September, with General 
Motors selling at 139%, or the equivalent of 181% be- 
fore the split-up, American Can at 181%, New York 
Central at 256%, U. S. Steel at 261%, Westinghouse 
at 289%, General Electric at 396%, Montgomery- 
Ward at 137%, equal to 466% for the old stock, and 
Radio at 101, or equivalent to 505 for the old stock. 

But the end was close at hand. On many sides it began 
to be heard first in whispers and then in louder intona- 
tions, that business was getting bad. Steel orders were 
falling off. Carloadings were down. Automobile sales 


were slowing up. This was not the sort of news needed to 
sustain an overextended market, so prices broke again. 
The list of stocks cited above sold off from 20 to 50 
points, but still there were takers as fools rushed in 
where wise money feared to tread and the big boys un- 
loaded their lines. Ignoring the plain facts of the situa- 
tion, gullible traders took comfort in the thought that 
the latest collapse had been due to the failure of the 
Hatry companies in England, which had occasioned 
liquidation on the American market. It was a temporary 
reaction, that was all. The market would correct itself, 
as it always had. Now was the time to step in, they 
argued, when stocks are off a few points. It may be the 
last chance to get aboard. 

But the last chance had already passed and, in spite of 
occasional spurts, the market as a whole continued to 
slide downhill, by almost imperceptible stages, it is 
true, but nonetheless surely, until it rested at levels 
ranging from 10% to 20% below the peak. 

Early in October the situation had become so grave 
that Mr. Mitchell again felt it necessary to go to the 
rescue, this time with a reassuring statement, bethinking 
himself, no doubt, of some millions of "undigested se- 
curities" that lay upon the shelves of his bank's affiliate, 
the National City Company. "Although in some cases 
speculation has gone too far", he solemnly announced, 
"the markets generally are in a healthy condition. The 
last few weeks have done an immense amount of good 
by shaking down prices. . . . Market values have a 
sound basis in the general prosperity of the country." 
Following this up two days before the final crash came 
he delivered this opinion: "I know of nothing funda- 
mentally wrong with the stock market or with the un- 
derlying business and credit structure", then added this 


wise-crack: "The public is suffering from broker's loan- 


As the market slipped from the peak Mitchell had 
plenty of support. In fact, two weeks earlier Col. 
Leonard P. Ayres, noted statistician of the Cleveland 
Trust Company, had anticipated his sentiments by de- 
livering the sage opinion that "there does not seem to 
be as yet much real evidence that the declining stock 
prices are likely to forecast serious recession in general 
business. Despite the slowing down in iron and steel pro- 
duction, in automobile output and in building, the con- 
ditions which result in serious business depressions are 
not present". 

Even such a reliable commentator as Professor Irving 
Fisher, of Yale University, joined the chorus when he 
stated in a public address that stocks had reached "what 
looks like a permanently high plateau" and added that 
he expected to see the market within a short time a 
"good deal higher than it is today". 

That the university authorities were uniformly wide 
of the mark was indicated by a statement of the Harvard 
Economic Research Society issued during the early 
stages of the ensuing panic, on October 26, to be exact, 
to the effect that "despite its severity, we believe that 
the slump in stock prices will prove an intermediate 
movement and not the precursor of business depression 
such as would entail prolonged further liquidation." 

Following the early October reactions, there is no 
doubt that most operators, large and small alike, looked 
for an early recovery and a resumption of the advance 
to those higher levels of which Professor Fisher spoke. 
In fact, the Boston News Bureau confidently stated that 
"the recent break makes a firm foundation for a big bull 
market later in the year". 


But the "big bull market" did not materialize. In- 
stead came disaster in the form of an avalanche of 
liquidation, starting on October 23rd with over 6,000,- 
000 shares and reaching a climax on October 29th when 
16,410,030 shares changed hands. For two long weeks 
frenzied selling continued, carrying prices down to 
levels that were unbelievable in the face of quotations 
that had obtained prior to the break. During this period 
the New York Times averages for fifty leading stocks 
dropped from 311.90 in September to 164.43 in No- 
vember, or 47 per cent ; the average for twenty-five in- 
dustrials fell from 469.49 to 220.95, or 53 per cent. 
As a whole, stock values were more than cut in half and 
$50,000,000,000 of paper profits were wiped out. The 
victims ranged all the way from boot-blacks to industrial 
magnates and there was scarcely a hamlet in the country 
in which some one did not feel the heavy hand of ruin. 

Such was the burden that the inflation conspiracy laid 
upon a happy land. 



"WHOM THE GODS DESTROY they first make 
mad." If this old Latin proverb is founded on fact it is 
certain that the gods had their hands full during the 
halcyon era that preceded the crash, for the whole 
world went mad. And not all the insanity that blossomed 
forth during this period was confined to the man in the 
street. Most of all, it affected those in high places, and 
maddest of all the wild men who kept the pot of inflation 
boiling were the so-called bankers who ruled our great 
financial institutions. 

At the head of the greatest bank in the country was 
not a banker but a super-salesman, who started life as a 
peddler of commercial paper, later became a bond sales- 
man and ultimately found a larger field for his talents 
as the dominant figure in the National City Bank, of 
New York. More than any other individual, Charles E. 
Mitchell has borne the brunt of the charge that the 
depression was brought about through the greed and 
ineptitude of bankers, and he has paid a certain price, 
both in the loss of his fortune and in personal humilia- 
tion; but this is nothing to compare with the plight of 
hundreds of thousands who were led by his exhortations 
and example to risk all on the merry-go-round of high 



Mitchell was a man of masterful personality. The 
head of the table was always where he sat. However 
bizarre his proposals, his convincing manner and dom- 
inating personality invariably swept aside all opposition 
and he had his way. Next to Samuel Insull and Ivar 
Kreuger, he was probably the premier promoter of his 
day a salesman who sat in the driving seat of the 
banker. Being a super-salesman, he undoubtedly sold 
himself on his own righteousness and on the soundness 
of his projects, but history records that they left a trail 
of grief and disaster that has not been equalled in any 
previous age. And chief of all his promotions was the 
National City Bank itself, which he found a substantial 
institution of moderate size and left a gigantic cripple, 
facing a write-off in its assets amounting to a quarter of 
a billion dollars. 

Mitchell entered the National City Bank by way of 
its security affiliate, the National City Company, where 
his energy worked astounding results during the ad- 
ministration of James E. Stillman, who later made the 
front pages of the tabloids in a sensational effort to 
disprove the paternity of his child and divorce his wife. 
Failing in this, he was promptly divorced from the bank 
and Mitchell took his place. Followed a series of mer- 
gers, absorptions and amalgamations which finally es- 
tablished it as the biggest bank in America, r'th total 
resources in excess of a billion dollars, and apparently 
Mitchell's first dream was realized. 

But this, it appeared, was merely a stepping stone 
to greater ambitions. In the back of his head seemed to 
lurk a design to dominate the banking activities of the 
nation, if not, indeed, of the universe. Gradually the 
National City Bank pushed its outposts into the far 
corners of the world, establishing branch offices or 


agencies all the way from London to Tokio and its re- 
sources rose to hitherto unprecedented size. In the 
meantime, under the stimulus of this expansion, its stock 
soared in the market until it reached a figure of $585 a 
share, despite a five for one split-up. In an effort to 
create a broader market the bank resorted to the now 
familiar device of loading up its own employees, who 
bought the stock on a time-payment basis at high prices 
and later found it necessary to divert their meagre 
salaries to make good their subscriptions, while the 
bank's higher officials were relieved of the same re- 
sponsibility or given access to loan funds in order to 
complete their purchases. In this way one vice-president 
was carried for the sum of $296,000, another for $345,- 
272. All told such loans amounted to $2,400,000. So 
fared the favored few on the National City's roster, 
while the poor clerks paid up what they owed. So far 
as the public was concerned, they were simply shorn, as 
lambs are wont to be shorn. 

From this comparatively simple form of skulldug- 
gery Mitchell and his gang went on to more extensive 
and more complicated operations. Few of the big specu- 
lative pools failed to find a place for the bank or its 
affiliate, and after the inevitable distribution the public 
invariably held the bag, while the pool operators got 
out with their profits. Anaconda, Columbia Grapho- 
phone, Radio, United Aircraft and a host of minor is- 
sues were favorite mediums for this form of exploita- 

Not to be outdone by other banking institutions, 
National City and its security affiliate became actively 
involved in foreign bond underwritings and were re- 
sponsible for unloading on the gullible public some hun- 
dreds of millions of these so-called securities, which in 


the course of time turned out to be mere sink-holes of 
wealth. Came the Crash and Mitchell's world tumbled 
about his ears. His pools collapsed, his bond issues de- 
faulted and National City stock hit a low of $24 
per share. Mitchell himself was caught in the maelstrom 
and after sacrificing his private fortune, ended up with 
even his Fifth Avenue house and Tuxedo country estate 
in pawn to a partner of J. P. Morgan and Company. As 
a final blow, he slipped up in testifying before a Con- 
gressional Committee so far as to admit the receipt of 
bonus funds and other profits which he had failed to in- 
clude in his income tax returns, with the result that he 
was promptly indicted and placed on trial in the Federal 
courts. At the trial he was acquitted, but not until his 
resignation as Chairman of the National City Bank had 
been demanded, and he walked out of the great institu- 
tion of which he had been the head a broken and dis- 
credited man. 

Less spectacular, shrewder but just as destructive in 
their ultimate effect, were the operations of Clarence 
Dillon, who built up and finally headed the great firm 
of Dillon, Read and Company. Like another Columbus, 
he rediscovered Latin America and set out to make it 
the hinterland of Wall Street. Starting with an issue of 
Brazilian 8's, he underwrote South and Central Amer- 
ican bond issues to the tune of some two hundred mil- 
lions, and most of these are now worth little more than 
the paper on which they are printed. First, the Brazilian 
issue of $25,000,000, which netted a profit of $467,125 
to the firm. Then a second issue of the same amount, on 
which the profit was doubled. Followed $12,000,000 
for the city of Rio de Janeiro, which netted the firm a 
little matter of $369, 695; $12,500,000 for Bolivia, then 
$23,000,000 more, showing a combined profit of $1,- 


558,219. Altogether the firm underwrote more than a 
billion and a half of foreign bonds at a gross profit that 
is almost incalculable. 

But Dillon is known best of all for the Dodge deal, 
one of the most extraordinary pieces of financing ever 
conceived. The two Dodge brothers had died largely 
from the effects of boot-leg liquor and their great au- 
tomobile property was kicking around the Street, look- 
ing for a buyer. The smart crowd on the "Corner' 7 , hav- 
ing whetted their appetites on General Motors, were 
open for a deal. In fact, they were prepared to offer a 
fabulous sum, when Dillon took the play away from 
them and coolly handed over to the Dodge estate his 
check for $146,000,000. Almost before the check had 
cleared, a banking group took the property off his hands 
and the public avidly bought up the issue while the certif- 
icates were still damp, but when all was said and done 
Dillon turned up with a majority of the Class "B" com- 
mon stock, which held entire voting control of the prop- 
erty, although the public had paid for it. The transaction 
was a neat bit of high financing and incidentally estab- 
lished a precedent by capitalizing good will as the basis 
for a preferred stock issue, which was the form of the 
main offering. Later Dillon's bonus stock was exchanged 
for stock of the Chrysler Corporation, which sold as 
high as $140 in the market. 

Somewhat earlier Dillon had pulled off a similar deal 
in an operation involving $100,000,000 of financing for 
the Goodyear Company. In this case he put in a man- 
aging organization, in which his firm maintained an 
interest that paid it a large return, but this arrangement 
was finally attacked by the stockholders and its aban- 
donment forced. 

In the orgy of investment trust promotion that swept 


over the financial world toward the end of the pre-crash 
era Dillon proved to be an adept in setting up and float- 
ing such issues and they added not a little to the profits 
of his firm. A graphic example was the organization of 
the United States and Foreign Investment Corporation 
and its sister enterprise, the U. S. and International 
Securities Company. The first corporation was organ- 
ized with a capitalization of 250,000 shares of first 
preferred stock having a par value of $100 per share, 
50,000 shares of second preferred stock and 1,000,000 
shares of common stock. The first preferred, along 
with a bonus of a share of common stock for each share 
of preferred, was sold to the public through Dillon, 
Read and Company's syndicate connections for the sum 
of $25,000,000, less a selling cost of $1,000,000, of 
which Dillon's firm pocketed $339,000. As a part of the 
deal Dillon and his associates acquired the entire issue 
of second preferred stock and 750,000 shares of the 
common stock for the sum of $5,100,000. In other 
words, the common stock cost them $100,000, or ap- 
proximately 13 1/3 c per share. In the rising market that 
followed this stock acquired a book value of $48 per 
share and sold as high as $72 per share on the Stock 

But that was not all. It was not longbef ore the trust ac- 
cumulated a surplus of some $10,000,000, which would 
ordinarily have been distributable in dividends to the 
holders of common stock, but Dillon and his crowd had 
other plans. They used this fund as a nucleus for form- 
ing a second, or subsidiary, trust, which put them in 
control of $60,000,000 more of the public's money. This 
trust, known as the U. S. and International Securities 
Company, was organized with a capitalization of $50,- 
000,000 of first preferred stock, which was floated by a 


syndicate headed by Dillon, Read and Company, and 
$10,000,000 of second preferred stock, which was 
bought, together with 2,500,000 shares of common 
stock, by the parent trust, namely United States and 
Foreign Investment Corporation, which was already 
controlled by the Dillon interests. In the final analysis, 
the surplus of the parent trust was used to lay the foun- 
dation for the second trust and the combined operation 
put the management, which consisted of Dillon and his 
partners, in control of approximately $90,000,000 of 
money contributed by the public. 

In the course of the testimony before the Senate 
Banking and Currency Committee it developed that 
the partners of Dillon, Read and Company unloaded 
120,552 shares of United States and Foreign common 
(which had cost them 13 l/3c per share) at $52 per 
share, to net them a profit of $6,819,000, or 28,000%. 
This was accomplished as part of a market operation, 
in the course of which the same individuals, who were 
also officers of the trust in question, entered into an 
arrangement to sell the stock of their own trust short. 

Before the collapse of the market in 1929 Dillon was 
shrewd enough to see the handwriting on the wall and 
he reduced his commitments to a point where he was 
caught with little or no "undigested" securities on his 
shelves when the break came. 

Dating practically from Civil War days, one of the 
pillars of the Street had been George F. Baker, who had 
been responsible for building up the First National 
Bank, perhaps the soundest and most conservative 
financial institution in the country. An associate of the 
elder Morgan and closely identified with most of his 
early financing and reorganization projects, he had 
acquired large equity interests in these properties and 


was the largest individual stockholder in many leading 
industrial and financial institutions. Cautious of speech 
as he was, it was Baker's boast that he had never sold 
a stock in his life, and this dictum had no little influence 
on the rising market of the early Twenties. Knowing 
that the Old Man had unbounded faith in the industrial 
future and in a continued increase in equity values, an 
army of investors bought stocks and took them out of 
the market or held them for the "long pull". This, of 
course, played straight into the hands of the wily opera- 
tors, who based their hopes upon a continuation of the 
upward trend. It is difficult to believe that Baker did 
not recognize the nature of the forces that were at work 
in the market. As a banker he had ample opportunity to 
note the direction of credit and his long experience can- 
not have failed to warn him of the inevitable conse- 
quences of inflation. Yet it is of record that he did not 
raise his voice in protest. At no time, in fact, did he even 
take the cautious step that Mellon took when he hesi- 
tatingly put forward the suggestion that the time had 
come to buy bonds. On the contrary, through a leading 
brokerage firm in the Street, his influence was actively 
exerted to prevent liquidation and, as late as the fall of 
1929, to disseminate the impression that the Bull Mar- 
ket was just getting under way. As a result many wise 
investors who recognized the inherent dangers in the 
situation and were sorely tempted to sell held on, to 
their sorrow, and ultimately saw their millions in paper 
profits disappear like a mirage, leaving them shorn and 

As the era approached its end, Baker was a very old 
man ; he was entering the nineties, in fact, and this may 
have clouded his judgment, but there is no reason to 
doubt that he was used as a stalking horse by the 


younger and more conscienceless element which directed 
the course of events. Like the "greatest Secretary of the 
Treasury since Alexander Hamilton", he emerged from 
the crash lacking much of the prestige that surrounded 
him in earlier days and poorer by some hundreds of 
millions. If not directly chargeable with a share of the 
responsibility for what happened, he became at least a 
pathetic figure and a living illustration of a man who 
had outlived his times. 

But Baker's bank kept its skirts clean. It possessed a 
security affiliate, like other big banks the First Se- 
curities Company. In fact, it set up the first institution of 
this sort, but its affiliate took no part in the nation-wide 
effort to swamp the investing public with securities of 
doubtful value. It had no distributing organization. It 
was not a factory but functioned solely as the repository 
for investments which the bank itself could not properly 
hold under the banking laws. 

Baker was not alone in his misjudgment of the finan- 
cial and economic maladjustments that underlay the 
crash and led to the subsequent depression. He had such 
good company as the Rockefeller interests, who offered 
to buy 1,000,000 shares of Standard Oil of New Jer- 
sey at the bottom of the break in a vain effort to stem the 
tide of liquidation and followed this up with a hundred 
million dollar mistake in 1929, when they undertook 
the greatest real estate operation of all time in build- 
ing Rockefeller Centre, now better known as Radio 
City, in New York. It is said that this gigantic project 
never met with the approval of old John D. Looking 
down from the vantage point of his ninety-odd years, 
the old man expressed the opinion that the family had 
made its fortune in oil and they had better stick to it, 
but young John D. was looking for an outlet for the 


family's surplus funds and decided to go ahead despite 
his father's warning, with the result that the estate was 
forced to borrow money for the first time in its ex- 
perience. All told, it is said that the Rockefeller fortune 
was cut in half by the lack of vision of its managers dur- 
ing the period of the depression. 

But not all of the Rockefellers fared so poorly. Percy 
Rockefeller son of John D.'s brother William is 
reputed to have been right on the market at all times 
and when the speculators were pushing it sky-high he 
shrewdly sold stocks short and accumulated profits 
which established his personal fortune almost on a 
parity with that of the Rockefeller estate. It is certain 
that he maintained his short position well into the 
Thirties and had no cause for regret. 

One of the brighter lights of the banking fraternity 
who contributed his full share to the debacle of 1929 
was Albert H. Wiggin, who presided over the des- 
tinies of the Chase National Bank. Coming from Bos- 
ton originally where he learned the trade of the banker 
and picked up a knowledge of high finance which he was 
to put to use later in Wall Street with disastrous re- 
sults to investors he took a leading part in the transfer 
of American dollars to Germany and other impecunious 
foreign creditors, involving his bank to the extent of 
$60,000,000 or more and placing a burden of many mil- 
lions more on the shoulders of American investors 
through the flotation of foreign bond issues by the 
Chase Securities Corporation. A leader in the new school 
of salesmen-banker, Wiggin built up a chain-store se- 
curity selling organization which was second only to 
that of Mitchell and the National City Bank, and like 
Mitchell he paid the penalty for his sins by the loss of 
his job. Later the Chase National Bank passed into the 


control of the Rockefellers through a trade involving 
the surrender of their interest in the Bankers Trust 
Company valued at $170,000,000 and absorption 
of the Equitable Trust Company, and its affairs are now 
in the capable hands of Winthrop W. Aldrich, brother- 
in-law of John D., Jr., and originally a Standard Oil 
lawyer. Wiggin's personal operations, undertaken 
largely on the credit and at the risk of his bank, were 
undoubtedly the gravest scandal disclosed by the in- 
vestigation conducted under the auspices of the Senate , 
Banking and Currency Committee. 

Long years ago J. P. Morgan the elder himself issued 
the ukase "Never sell America short", and it passed 
immediately into the gospel of the investor. In later 
times, under the influence of investment trust manage- 
ments, elaborate arguments were built up to establish 
the long-term investment value of common stocks. Dur- 
ing periods of inflation it is obvious that the appeal of 
equity values is irresistible and this propaganda con- 
tributed directly to an ascending scale of values. "Buy 
stocks and hold them for a long pull", said self-ap- 
pointed advisers to the uninformed investor and their 
counsel was confirmed by weighty pronouncements from 
the seats of the mighty. The thought that stocks were 
ever to be sold never seemed to occur. It was unthink- 
able to the deluded investor and positively abhorrent 
to the element that was interested in putting the market 
up. During the seven-year period ending with 1929 
some hundreds of thousands of shares of stock were 
taken out of the market annually either by individual 
investors or by investment trusts. Both were to have a 
rude awakening. 

From time immemorial every period of inflation has 
ended in panic and depression. Were the minds that 


ruled Wall Street so obtuse that they failed to recognize 
this fact? Were bankers so swept away by the new 
school of thought that they deliberately ignored the ex- 
perience of centuries? It is to be doubted. Back of the 
plight in which the nation came to find itself was greed 
nothing more or less. Greed for commissions that 
came out of the boiling stock market. Greed for bank- 
ers' profits that were to be got out of the sale of doubt- 
ful securities to a hungry and credulous public. A deep- 
laid plan to push values to a point where collapse was 
inevitable and the man with money otherwise desig- 
nated as the banker would find himself in a way to 
take over on his own terms the man who was over-ex- 
tended. As it happened the movement was allowed to go 
too far. It carried to a point where the repositories of 
funds themselves became involved and the moneyed in- 
terests were unable to find the means that were needed 
to take advantage of the lush bargains which adversity 
had created. The Great Conspiracy defeated itself. 

But who is to be held responsible? The gullible in- 
vestor who went wild with dreams of untold riches, or 
the far-seeing, avaricious minds that laid the plot ? That 
some of these apostles of greed were victims of their 
own designs is some measure of justice, but it does lit- 
tle to mend the broken lives and crushed souls of the 
millions who kept the pot boiling. 



AS FAR BACK as 1922, when American business was 
entering upon the first stages of recovery after the post- 
war depression and the bankers were casting about for 
outlets for the investment funds which were then in 
process of accumulation, a mysterious, glamorous figure 
appeared in Wall Street. Heralded as the financial gen- 
ius who had whipped the match industry of the world 
into shape and made it the basis of a gigantic monopoly, 
Ivar Kreuger was well fitted to win his way into the 
inner circles of finance, where a new race of interna- 
tional-minded but none-too-careful bankers were making 
ready to take the places of the solid, hard-headed finan- 
ciers of the pre-war era. Shrewd, well-spoken and brim- 
ming with self-confidence and personal magnetism, he 
made short work of Wall Street and returned to Sweden 
with assurances from one of the leading banking houses 
of New York and Boston, Lee, Higginson and Com- 
pany, to join him in his grandiose undertakings. In the 
course of the next ten years this casual visit cost the 
American investing public some $250,000,000 and led 
Kreuger himself to a suicide's grave. 

Superman and weakling, gentleman and swindler, 
gambler and builder, Ivar Kreuger was probably the 
strangest paradox of all time and his operations have 



had no parallel since the South Sea bubble of John Law. 
How he managed to conceal the true nature of his ac- 
tivities and impose his colossal schemes upon an unsus- 
pecting world can only be explained by criminal lack of 
caution or unexampled stupidity on the part of the 
bankers with whom he had to deal. He handled them 
like schoolboys while he built up a financial empire on 
the basis of fraud and deceit. 

Ruler of men as he was, Kreuger was not born to the 
purple. The son of middle-class parents in the little 
Swedish town of Kalmar, he broke away from family 
traditions early and turned up in Chicago, Illinois, in 
1900, as a real estate salesman. Not making a great 
success in this line he took ship for Vera Cruz, where 
he had obtained a job with an engineering firm. For some 
years he drifted around Latin America working on con- 
struction jobs and finally arrived in New York, where 
he went to work for the Fuller Construction Company. 
As an engineer he had a hand in building the Flatiron 
Building, Macy's, The Metropolitan Life building, and 
the Plaza and St. Regis Hotels. Following this he 
headed for London, where he found work with a build- 
ing concern, which sent him to South Africa. There he 
went into business for himself and promptly went broke, 
but made his way back to Canada and finally to New 
York again, where he secured a job with a construction 
firm and took charge of the erection of Syracuse Univer- 
sity Athletic Stadium, in recognition of which the Uni- 
versity conferred an honorary degree upon him in 1930. 

By this time Kreuger, who was now twenty-seven, 
came to the conclusion that he had knocked around 
enough and decided to return to his native land, where 
he felt there was a need for his talents and experience. 
A year or so later we find him back in the construction 


business and located in Stockholm, where he had formed 
a partnership with Paul Toll and the great firm of 
Kreuger and Toll got its start. They began business 
with a capital of only 10,000 kroner $2,666 at the 
then rate of exchange but it was not long before the 
partnership had outgrown its original form and in 1911 
the firm was incorporated with a capital of one million 
kroner. From this point on its record was one of con- 
stant expansion, both in the scope of its interests and 
capital, until with its affiliated enterprises it represented 
a total investment of about a billion dollars. Through- 
out Kreuger was the guiding genius and Toll played a 
passive part. 

Kreuger's family had been in the match-making busi- 
ness for some generations and about this time had united 
three or four small plants which they owned in a single 
concern. In its origin and development match-making 
was largely a Swedish industry. The business was di- 
vided up into many small plants and one large concern, 
which was the outgrowth of the consolidation of six 
sizeable plants. Turning his attention to this industry, 
within a short time Kreuger succeeded in merging the 
seven leading concerns in the Kalmar district and this 
laid the foundation for his later operations. Within five 
years he took over the older and larger group and so 
laid the basis of his claim to the title of "Match King". 
Out of this combination grew the Swedish Match Com- 
pany, which acquired the match business of Kreuger 
and Toll, leaving the original firm to function largely 
as a holding company, but in this capacity it was a close 
rival to the match company, both in point of capital and 
in the broad scope of its activities. Both companies paid 
large dividends from the start and with Kreuger's mar- 
vellous persuasive powers this served as a tool with 


which to raise some half billion dollars or so within the 
next ten years. 

When Kreuger paid his historic visit to Wall Street 
he was already a mythical figure. Reputed to be pos- 
sessed of extraordinary powers of organization and of 
persuasion, he was surrounded by an atmosphere of 
mystery which lent cubits to his height. At that time he 
had already started his program of vast loans to Euro- 
pean Powers, in return for which he obtained the match- 
making concessions, or monopoly, in their dominions. 
Ultimately he supplied $384,000,000 to various gov- 
ernments in this way and so secured a virtual monopoly 
of the match business outside of America. In doing this, 
as it later developed, he made two mistakes. First, he 
loaned the sum of $75,000,000 to France at a five per 
cent interest rate and France promptly turned around 
and used the funds to pay off an eight per cent loan 
made through J. P. Morgan and Co., much to the dis- 
gust of that great banking house, which hated to be 
deprived of its liberal interest return and so laid up a 
healthy grudge against Kreuger. Late in 1929 he also 
agreed to loan Germany $125,000,000 and it was this 
transaction that brought about his undoing. 

Naturally it is to be assumed that these millions which 
Kreuger handed out as carelessly as cigars had to come 
from somewhere. At the start a considerable part came 
out of the Dutch and Scandinavian investment markets, 
for Kreuger was cosmopolitan in his favors, but the 
drain on these markets finally proved too great and 
Wall Street became the ultimate victim of his vast finan- 
cial schemes. Something between two hundred and fifty 
and three hundred million dollars were dumped into the 
Kreuger pot during the years of plenty that preceded 
the depression and most of it disappeared as completely 


as if it had been consumed in the fire that kept the pot 

Just how this occurred is an interesting and intricate 

With the apparent purpose of concealing his tracks, 
the Match King finally built up both Kreuger and Toll 
and Swedish Match, along with their sister enterprise, 
the International Match Company which was created 
for the special benefit of American investors into a 
vast conglomeration of corporations and holding con- 
cerns, whose ramifications even a Philadelphia lawyer 
would find difficult to ferret out. In so far as informa- 
tion has come to light since his death, the record briefly 
is this and it undoubtedly shows Kreuger up as the 
greatest confidence man of the ages : 

At the time that Kreuger had his first luncheon meet- 
ing with Donald Durant and Frederick W. Allen, part- 
ners in the firm of Lee, Higginson and Company, in 
1922, the Swedish Match Company was well along the 
road to the position that it later acquired when its share 
capital ultimately attained a total of 360,000,000 kro- 
ner, its reserves 200,000,000 and its bonded debt 60,- 
000,000. It dominated the match industry of the world 
with 250 plants in forty-three countries and monopolies 
in twenty-five countries. It made seventy-five per cent of 
all the matches sold throughout the world. Back of the 
Swedish Match Company was a network of corpora- 
tions, some real and some "phony", and control of the 
company lay with Kreuger and Toll. In addition to this 
Kreuger and Toll owned, or came to own, the Swedish 
Pulp Company most important European producer of 
sulphite and sulphate pulp (required in making 
matches) ; the Capital Real Estate Company, or Huf- 
vudstaden, owning eighty-seven large buildings in the 

leading cities of Sweden, with a book value of 71,000,- 
000 kroner ; a one fifth interest in the Grangesberg Oxel- 
osund Mining Company, a valuable iron mining prop- 
erty controlling about two billion tons of rich and easily 
workable iron ore, together with minority interests in 
two Stockholm banks and in the Banque de Suede et 
Paris, in Paris, and the N. V. Hollandsche Koop- 
mansbank, in Amsterdam. When Kreuger waved this 
list of his interests before the bankers and told the 
story of the upbuilding of his properties, as only he 
could tell it, they were duly impressed and appeared 
eager to get in on this "good thing". As he later told a 
Swedish friend, "You Swedes are blockheads", he said, 
"You haggle about giving me money. But when I get 
off the boat in New York I find men on the pier begging 
me to take money off their hands." Following his profit- 
able stay in the Street, Kreuger returned to Stockholm, 
stopping off at London on the way, in order to make the 
acquaintance of the British partners in the Lee-Higgin- 
son firm, and promptly set out to "rig the game" for the 
benefit of his American bankers. 

The first step in the confidence game was to propose 
an entirely new corporation, to be known as the Inter- 
national Match Corporation, which would act as the 
repository of funds to be derived from American financ- 
ing and so to lend an appearance of security. But the 
security was one of appearance only, for from the start 
Kreuger laid down an arbitrary rule that he, and he 
alone, should have the power to shift assets from one 
concern to another as exigencies required. That the 
New York bankers agreed to this can be explained only 
on the ground that they were so captivated by his per- 
sonality or so eager to get a share of the banking profits 
which seemed to be in sight, that their good judgment 



was wholly suspended. As it developed, out of $148,- 
000,000 that was paid into the International Match 
Company, $144,500,000 found its way into the treasur- 
ies of Kreuger's other companies or into his own pockets 
and when the corporation went into bankruptcy in 1932 
it was practically without assets. 

About the time that the International Match Com- 
pany made its appearance Kreuger also organized a 
"secret subsidiary", the Continental Investment Corpo- 
ration, which enters into the record in due course. For 
reasons that later dazzled the bankers this corporation 
was domiciled in the little State of Lichtenstein, the 
home of 9,759 people, mostly peasants, and 747 cor- 
porations which were mainly interested in tax dodging. 

The International Match Corporation started off 
with a capital of $28,000,000. As the proceeds of this 
financing were made available, the function of Con- 
tinental became apparent. Kreuger convinced his asso- 
ciates that large taxes would be avoided, by reason of 
the lax laws of the State of Lichtenstein, through using 
the "dummy" corporation as a depository for Inter- 
national's assets and surplus and the funds were 
promptly transferred to this account. Inasmuch as 
Kreuger's companies controlled Continental entirely, 
the International lost all knowledge of what happened 
to its assets after they passed into the subsidiary's pos- 
session. All that it had was a book-keeping credit. The 
Continental rapidly developed into a sewer into which 
International's cash and securities were dumped as fast 
as they came in and then parcelled out by Kreuger as 
he saw fit. In this way, or by even more dubious methods, 
International Match Corporation got rid of some 
$150,000,000 during its eight-year career. 

Aside from the International Match financing, Amer- 


ican investors provided Kreuger with funds to the ex- 
tent of some $50,000,000 on Kreuger and Toll deben- 
tures, for which, however, they had only themselves and 
their bankers to blame, for the indenture was drawn in 
such a way that it practically invited theft. After de- 
scribing the deposited securities the indenture provided 
for the substitution of: 

"Bonds or notes issued or guaranteed by sovereign 
states, provinces, municipalities or other governmental 
subdivisions duly powered to issue or guarantee bonds 
or notes but in no case where the population is less than 

"Bonds or notes issued or guaranteed by mortgage- 
banking institutions (in which the company may, but 
need not, have an interest) and secured by mortgages 
on agricultural or city property or entitled by special 
law to priority on such property, and 

"Shares in railway or other companies on which divi- 
dends at a minimum rate or otherwise are guaranteed by 
sovereign states." 

In other words, the questionable bonds of Russia, 
Mexico, China, Peru and Bolivia, or the German Forced 
Loan of 1922 (worth about $5 a million), or the 
equally worthless Mexican Railway Issues could be sub- 
stituted for any of the original collateral. When Kreu- 
ger finished manipulating this collateral some $59,000,- 
000 (par value) of valueless securities remained on 
deposit and he had abstracted every bond that had a 
market value. 

Incidentally this issue of debentures, worthless as 
they were, was offered to American investors by a syn- 
dicate including such notable houses as Lee, Higginson 
and Company, The Guaranty Company (security affil- 
iate of the Guaranty Trust Company), the National 


City Company (security affiliate of the National City 
Bank), Brown Brothers and Company, Dillon, Read 
and Company and the Union Trust Company, of Pitts- 
burgh. According to the offering circular legal details 
were approved by Ropes, Gray, Boyden and Perkins, 
of Boston, and Carter, Ledyard and Milburn, of New 
York. Is it any wonder that the befuddled investor was 
taken in? 

For nine long years the Mighty Man sailed along on 
the crest of the wave, mulcting the gullible public and 
pulling the wool over the eyes of the still-more-gullible 
bankers. When they got up courage enough to ask him 
questions he evaded them. If they asked for information 
he blandly refused it, generally on the plea that it in- 
volved the disclosure of matters which were "state 
secrets" between himself and the governments with 
which his monopolies dealt. In all that time there was no 
audit of the books by an independent auditor. If figures 
were given they were such figures as Kreuger or his 
creatures supplied. And all the while his reputation 
mounted. The sum of his achievements grew. First, a 
thirty-two million dollar loan to Poland. Then the 
seventy-five million dollar French loan. At last the hun- 
dred and twenty-five million dollar German loan. Fatal 
error I 

As Kreuger's name became mightier in the realm of 
finance, statesmen turned to him for help and guidance. 
His suave, convincing manner was credited with having 
blocked the failure of the Young loan negotiations. He 
assumed part of the financial burden on behalf of his 
companies and Paul Renaud got up on the rostrum of 
the French Senate and publicly thanked Kreuger for his 
part in contributing to the solution of international 


But this was the high-water mark in his fortunes. 
From this point on his star began to descend and the 
end was sudden and tragic. 

It began with the German loan and the Morgan 
enmity added the finishing touch. When Kreuger con- 
cluded his negotiations with the Reich in the fall of 
1929 the skies were still clear, but he reckoned without 
the market collapse that occurred at the end of October. 
Feeling the security of his position and relying on the 
ability to raise money which had never failed him, he 
went ahead and agreed to advance Germany the sum of 
$125,000,000, without completing his own arrange- 
ments for the money. Before he could arrange his financ- 
ing the bubble burst in Wall Street and he faced a pay- 
ment of $50,000,000 on August 30th of the following 
year, with $75,000,000 still to come. 

Assuming that the panic would blow over, Kreuger 
was not immediately concerned. In fact, he took a 
"long" position on the securities of his concerns, which 
ultimately made a further drain on his resources. De- 
spite this, however, he met the 1930 payment by switch- 
ing around the assets of his various companies, but this 
withdrawal just about scraped the bottom of the till. 
In January, of 193 1, he managed to float a $50,000,000 
gold debenture issue for the International Match Cor- 
poration, but this still left him twenty-five or thirty 
millions short on the final payment. Kreuger was still 
banking heavily on a turn in the market, but as the year 
wore along conditions got steadily worse and he be- 
came desperate. 

In this extremity the Match King committed the 
greatest crime of his career. Calling in the representa- 
tive of an engraving company, he ordered him to litho- 
graph an assortment of Italian Bonds, or treasury notes, 


to the equivalent of some 28, 000, 000, casually remark- 
ing that they would be sent to Italy for signature and 
authentication. But the bonds never went to Italy. In- 
stead, Kreuger forged the signatures of the Italian 
officials with his own hand and then distributed the 
bogus bonds among his various companies. Some nine 
millions went into the treasury of Kreuger and Toll. 
Fourteen millions went to the Continental Investment 
Corporation to replace the vast sums deposited to the 
credit of International Match, which Kreuger had al- 
ready abstracted. But this did not give him the cash 
funds that were needed to complete the German pay- 
ment. It merely dressed up the balance sheet, but on the 
strength of this showing he secured a loan of $30,000,- 
000 from one of the Swedish banks in which he held an 
interest and this enabled him to meet the payment when 
it fell due on May 1, although it exhausted both his cash 
resources and his credit. 

But this was not all. On July 1 interest on his deben- 
tures to the amount of some millions was due and he had 
to find money for this purpose, as well as for operating 
capital. The noose was tightening and as a last resort 
he opened negotiations with the International Tele- 
phone and Telegraph Company a Morgan concern 
looking toward the sale of his holdings in the Ericsson 
Telephone Company, a gigantic Swedish concern, in 
which Kreuger and Toll had acquired a controlling in- 
terest. A deal was arranged and Kreuger agreed to 
exchange 600,000 shares of Ericsson Telephone for 
400,000 shares of ITT., but immediately sold back 
his ITT. for $11,000,000 in cash, which took care of 
his debenture interest just in the nick of time. But a 
string had been tied to the International Telephone 
deal. The Morgan interests insisted that the final con- 

summation of the transaction should be subject to an 

It took some months to get this audit under way and 
in the meantime Kreuger was under constant pressure 
for funds. Through his American bankers he managed to 
get a bank loan of $4,000,000, but this was not enough. 
Returning to Sweden he negotiated a loan of 40,000,000 
kroner on a mining property which he held, but unfor- 
tunately the mining stock was not in his possession. It 
had been used as collateral for another loan. In order to 
free the stock he coolly lifted $50,000,000 of German 
bonds that had come to International Match through 
the German loan transaction and used them to take the 
mining stock out of pawn. Later he tried to cover the 
transaction by transferring the equivalent in forged Ital- 
ian bonds to the International Match account. 

During this period the stocks of all the Kreuger com- 
panies were getting a steady pounding in the market 
and many unfavorable rumors were afloat, but the situa- 
tion did not really come to a head until the Morgan 
auditors got busy. Within a few days they discovered 
an item of 27,000,000 kroner listed as "Cash" which 
actually consisted of amounts due from other Kreuger 
companies and the "fat was in the fire". The Morgan 
interests cabled for an explanation. Kreuger was unable 
to give a satisfactory one and the Morgan interests 
called the deal off and demanded repayment of the $11,- 
000,000 cash advanced. The news got around in Wall 
Street and Kreuger hurried across the ocean to quiet the 
furor. Naturally his American bankers were upset and 
for the first time they began to ask pointed questions. 
Unable to answer their questions, Kreuger "went to 
pieces". So they all boarded a steamship and set out for 
Stockholm. On the way the bankers determined to have 


an audit of their own and a prominent firm was engaged 
for the task. On reaching Stockholm Kreuger played 
for more time and finally induced all to go to Paris, 
where he was to meet his own auditors. 

By this time the condition of all companies was crit- 
ical and Kreuger's own people were frightened. They 
realized that there had been irregularities and they were 
worried about their own hides. When they met Kreuger 
in Paris they made it plain that he could not depend 
upon them further. His ship was sinking. As a last straw 
one of the bankers asked him why he did not raise money 
on the Italian bonds which Kreuger said he held. Kreu- 
ger dodged. The banker offered to open negotiations 
with the Italian Government for their repurchase. 
Knowing that the bonds were forged, there was nothing 
that Kreuger could say. The game was up. 

After this meeting Kreuger went out and bought a 
revolver. It was a 9 MM. army-type Browning and the 
next morning it was found by the side of the bed on 
which he lay dead with a bullet-hole through his heart. 



IN THE COLD, gray light of the morning after that 
day of crashing values in October, 1929, when the Big 
Bull Market definitely and finally came to an end, there 
were few who realized what had actually happened. 
The average man was bewildered by the quick succes- 
sion of events which had swept his world away. Margin 
call upon margin call, ten-point breaks between sales, 
stock tickers overworked an hour, two hours behind 
vanishing paper profits, fortunes swept into the dis- 
card these things he could understand. But what did 
it all portend ? Was it the end of an epoch or just another 
shake-down in values? Could it be that the new school 
of economists were wrong? Was prosperity to have an 
end, after all? 

Fortunately, there was no lack of prophets market 
letter writers, public officials, bankers and business lead- 
ers false prophets, one and all, but they were quick to 
minimize the disaster and reassure an anxious world, 
pointing with pride to the vast resources of this great 
nation of ours and the energy of its people. "Whatever 
happens," they united in saying, "the country will not 
go to the dogs". In a hurried effort to cover up the facts 
Dr. Julius Klein, Assistant-secretary of Mr. Hoover's 
pet Department of Commerce, announced that only 



four per cent of the population was affected, and a high 
official of the Federal Reserve System went on record 
with the unqualified statement that the break in the 
market "would not prove disastrous to business and the 
prosperity of the country 1 *. 

There was much more of the same tenor. Leaders in 
the business and banking world expressed such sage 
opinions as this: "The market was overextended and 
freed itself of a tremendous amount of margin trading", 
or "Any corrective movement in the market was not to 
be regarded as symptomatic of the trade movement," 
or "The decline in stocks will have no effect on the 
fundamental soundness of business conditions," or "The 
readjustment in stock prices will be helpful to the busi- 
ness situation". Blissfully ignoring the fact that busi- 
ness had been in a pronounced state of decline for four 
or five months before the break, they continued to ex- 
press themselves in terms of an era of growing pros- 
perity which had suffered an interruption, a minor 
set-back, that was all. 

As the crash fell into the background, these self- 
anointed prophets professed to discover increasing 
signs of recovery, evidences of rehabilitation, proofs of 
the fundamental soundness of conditions (a favorite 
mouthful), indications of the capacity of business "to 
surmount all obstacles". It took but a brief flight of the 
imagination to convince oneself that we were back again 
in the initial stages of another "boom" period, with an 
even greater bull market looming ahead. Many acted on 
this assumption to their cost. 

As the high priest of the New Economic Era, Presi- 
dent Hoover was among the first to register his faith in 
the future. "Within sixty days", he announced, condi- 
tions would return to normal, and took immediate steps 


to speed the return. Conference after conference was 
held at the White House. Financial and industrial lead- 
ers were called in; even the partners of J. P. Morgan 
and Company became open visitors. New commissions 
were set to work, as a result of which emerged a com- 
prehensive scheme of public works and an ill-advised 
building and spending program, sponsored by the public 
utility and railroad interests and reams of publicity. 
But the only part of the program that got into actual 
operation within the time limit set by the President was 
the last-named. For a time it looked as if we had set out 
to talk our way back into prosperity, and at first it 
seemed that the plan might succeed. For, slowly and 
painfully, the market gathered itself together and re- 
sumed its upward march. Hesitatingly hope appeared 
here and there, courage struggled to its knees, optimism 
feebly raised its head. 

In Wall Street messenger boys and margin clerks 
were called back to work. Vacant chairs disappeared in 
customers' rooms and the buzz of hopeful comment was 
heard again. The pool managers and manipulators took 
out their old tricks and dusted them off. Ivar Kreuger 
was able to raise some needed millions in a new flotation. 
Insull floated his investment trusts. Wiggin unloosed a 
new flood of General Theatres Equipment Debentures 
and completed arrangements to take over Fox Film. It 
looked as if the worst was over but not for long. For 
around the corner was not Prosperity but the Four 
Horsemen, led by a new recruit in the form of Depres- 

In President Hoover Big Business had attained its 
supreme objective the election of one of its own kind 
as head of the nation. It is true that there were incidents 
in his business career which required explanation. In 


fact, it was said in certain quarters which may not 
have been entirely unbiased that he was a promoter 
rather than a businessman, and the merit of some of his 
promotions was not above question. But there is no 
doubt that he was a devotee of Big Business and sub- 
scribed wholeheartedly to its tenets. With his election 
"master-minding" reached its heights, as exemplified 
by the Great Engineering Mind that was to lead us into 
a new world, where there was to be a "chicken in every 
pot" two chickens, many thought. That he failed was 
a personal tragedy, as it later came to be a national 
catastrophe. For in failing to avoid the consequences 
of the market collapse and the counsels of folly that led 
up to it, he had done something more than plunge the 
nation into depression. He had destroyed its faith in its 
leaders and this led to a waning confidence in its institu- 

The first shock came with the so-called secondary re- 
action in the market, which occurred during the late 
spring months of 1930. Just as the President's sixty-day 
time limit was about to expire the market broke again 
and the averages declined some 26 points, or more than 
10% within a month, followed by an even more drastic 
decline, carrying into the depths a small army of traders 
who had marshalled their remaining resources in a vain 
effort to "come back". On this occasion the results were 
even more disastrous for these fatuous souls than the 
Big Break had been, for when margin calls went out 
there were few who could respond. Their tills were 
empty. They had come to the end of their resources. 
Rightly or wrongly, they blamed the false prophets of 
recovery for their plight and gradually developed a 
deepening sense of wrong, the full force of which was 


to be vented on the President when he came up for 

Mr. Hoover was ready, of course, with a bagful of 
alibis. First, there was the unfortunate downfall in 
agricultural prices, which had affected the whole world 
although, it may be said in passing, that this was a 
phenomenon with which our farmers were not unac- 
quainted. Following this came the droughts, which fell 
with sterilizing effect on the Mississippi Valley states, 
and then a further decline in the value of farm products, 
blamed this time on dumping by Russia. With each of 
these occurrences the indices of business dropped lower ; 
the stock market continued its downward course. By 
mid-winter trade had reached the vanishing point and 
unemployment was more than a spectre it was a prob- 
lem. Five or six million people were out of work and the 
"apple man" stood on every street corner. 

But still it was not to be admitted that the nation was 
in the clutch of a depression. To do so was tantamount 
to abandoning the new economic philosophy with which 
both Wall Street and Washington were imbued. With 
one accord they set out to cover up the facts. Just as they 
had built up a myth of prosperity, they now attempted 
to create a myth about the collapse. Speculation in the 
Stock market was the cause of all our troubles, accord- 
ing to the classic explanation, which found favor in 
banking circles. Everybody was in the market, they said, 
jumping to a conclusion which was far from fact, 
since not more than a million were involved at the peak 
of the Bull Market and their losses had destroyed 
purchasing power. Why blame Mr. Hoover? Why 
blame the bankers? Why blame Wall Street? Let the 
speculators take their losses and the situation would 


correct itself. Depression? Bah! We were already well 
on the way to recovery. 

Doubtless there had been some decrease in purchas- 
ing power, as the apologists for the Administration con- 
tended, but 1 the cause was more deep-seated than the stock 
market. Summed up in four letters, it was D-E-B-T, 
foisted upon an ignorant and deluded world by the 
Great Conspiracy, which had made it easy to obtain 
credit, almost unavoidable to keep out of debt. When 
Wall Street and Washington joined hands in the move 
to create an unprecedented inflation of credit they signed 
the death warrant of prosperity and plunged half the 
nation into ruin. Slowly this fact began to appear and 
with it the specious explanations of the banking and 
political elements fell into disrepute. They were shown 
up as charlatans and their studied efforts to conceal the 
facts left them without a shred of standing in the public 

Roughly speaking, the depression divides itself into 
two grand phases a first, or preliminary, stage, which 
set in about the middle of 1930 and carried on until 
mid-summer of the following year, culminating in the 
Hoover Moratorium, which stimulated false hopes of 
recovery for a brief spell and then turned out to be a 
"dud" ; and a second, or final stage, during which the 
depression grew in intensity and the palliatives applied 
by the Administration uniformly proved ineffectual and 
left the nation in a state of collapse as the banking sys- 
tem failed and the Hoover regime came to an inglorious 
end. There was also a six months' prelude which was 
spent mainly in whistling to keep our courage up. 

As the first severity of the depression was about to 
make itself felt President Hoover was still full of con- 
fidence and announced late in May, 1930: "While the 


crash took place six months ago, I am convinced that we 
have now passed the worst and with continued unity of 
effort we shall rapidly recover. We have undertaken to 
stabilize economic forces". Bear in mind that at this 
time liquidation had not actually set in and overhanging 
business was a vast mass of frozen credit, which prac- 
tically destroyed the loaning power of banks. We had 
not begun to go through the wringer. 

Possessing this sublime faith in quick delivery from 
the dangers that beset us, nothing was done, little was 
attempted, to alter the course of events. Developments 
moved on to their logical conclusion and the first symp- 
tom of disorder was increasing unemployment. From 
April 30 to the end of the year the number of men out 
of work jumped from 2,500,000 to 6,000,000. ''Un- 
fortunates", they were dubbed, without effort to dis- 
tinguish between ordinary ineffectives and economic 
outcasts who are the by-products of industrial decay or 
maladjustment. Adopting the characteristic attitude of 
organized charity, every effort was directed toward help- 
ing these victims of the times to help themselves. It was 
important not to spoil them, according to the orthodox 
view. So a much-advertised movement was started to 
"Give a job". We were exhorted to find some job around 
the home or plant which could be given to the man out 
of work. Help the "down-and-outer" was the compel- 
ling motive. In many communities drives were put on to 
ease the situation. Apple-selling was universal, with 
celery or oranges taking the place of apples on occasion. 
But these were mere poultices. They could not affect the 
real problem, as unemployment was increasing from 
month to month and nothing was being done to correct 
the forces of destruction. At last real suffering and mis- 
ery began to appear during the winter and the question 


of relief was brought definitely to the fore, which in 
turn raised the issue of the "dole" hated word among 
the conservative-minded, for it opened the way to un- 
employment insurance, old-age pensions and all manner 
of evils that had put a burden on the backs of tax-payers 
abroad. Unemployment was essentially a local problem, 
said the old school, fearing the consequences of national 
legislation. Keep it local. 

The President set his face resolutely against any 
form of relief that savored of the dole and quickly be- 
came involved in a dispute with Congress which threat- 
ened the whole program. The situation came to a head 
in connection with the proposals advanced to relieve the 
victims of the Arkansas drought. This was a major 
disaster and the President immediately called on the 
Red Cross, which failed entirely to grasp the real grav- 
ity of the situation. Hastily rejecting the offer of a 
congressional appropriation, the organization insisted 
instead on putting on one of its customary "drives", 
estimating that at the most a meagre $10,000,000 
would be sufficient to relieve the situation, which was 
far from the actual requirements. "No dole", said the 
Red Cross, "We will rely on private charity", and made 
its appeal to the Heart of the Nation. After a good deal 
of effort they got their $10,000,000 and it was swal- 
lowed up almost overnight, without making any real 

Wholly in sympathy with the objects and methods of 
the Red Cross, of which he was the titular head, the 
President was outspoken in his attitude. "This is not an 
issue", he said, "as to whether people shall go hungry 
and cold. It is a question as to whether the American 
people will maintain the spirit of charity and mutual 
self help". In the end the issue narrowed down to 


whether the Federal Goverment should afford relief 
directly by gifts of money or goods or by loans to agri- 
culture, which was the form that relief finally took, 
except as to the initial aid provided through the Red 

In the Relief Bill, as finally passed by Congress, we 
find the inception of the entire program for fighting 
the depression as it was developed by the Administra- 
tion, which set itself unqualifiedly against outright con- 
tributions and adopted instead the indirect process of 
providing credit for industry, which in due time might 
trickle down to the victims of the depression through a 
general restoration of prosperity. It was this principle 
that led to the organization of the Reconstruction Fi- 
nance Corporation some months later. 

In a broad sense the question of industrial relief was 
bound up with the question of wages. From the start it 
had been the policy of the Hoover administration to 
maintain wages and in this purpose it had the support of 
industry, but as it developed this meant wage rates, not 
full pay to the worker. Facing a declining demand, it is 
obvious that manufacturers could not keep their plants 
running on full schedule and they were forced to a de- 
cision between wholesale discharges and a reduction in 
working hours, with a corresponding loss of pay. Many 
workers were let go to swell the army of the unem- 
ployed, but on the whole the trend was toward part-time 
work, so that the general problem of unemployment was 
confused by a great body of workers who were getting 
some pay but in many cases not enough to meet the costs 
of subsistence. Following the lead of the President, in- 
dustry as a whole set its face resolutely against a cut in 
wage rates and no general reduction in wage scales oc- 
curred, in the key industries at least, such as steel, until 


dividends had been suspended. Ironically one of the 
first voices raised in opposition to this policy was that 
gravy-bespattered banker who had profited so uncon- 
scionably at the expense of his bank, A. H. Wiggin, head 
of the Chase National Bank. "It is not true that high 
wages make prosperity", he stated. "Instead prosperity 
makes high wages", adding that he thought "many in- 
dustries may reasonably ask labor to accept a moderate 
reduction of wages, designed to reduce costs and to 
increase both employment and the buying power of 

Over against this was set the opinion of enlightened 
employers such as James A. Farrell, President of the 
United States Steel Corporation who opposed wage re- 
ductions in this wise: "Oh, no, wages in the steel in- 
dustry are not coming down; you can make up your 
mind to that fact. If you are going out to sell your goods 
and eliminate your profit and expect to get it out of the 
man in the mills, you are very much mistaken." 

The solution offered by this type of leader was to keep 
prices up, but economic forces were stronger than they 
and as the price level was maintained in any given in- 
dustry, consumption sagged, production was necessarily 
curtailed and unemployment resulted. In the end exist- 
ing wage scales were abandoned and a general move- 
ment toward lowered production costs set in. 

It was in this state, with wages coming down and the 
army of unemployed growing in numbers, that the coun- 
try came to the spring of 1931. Valuable time had been 
consumed in discussion but nothing of a constructive 
nature had been accomplished. The President was bent 
primarily, it appeared, on saving his face and he busied 
himself in looking about for another bug-a-boo. He 
found it at last in "short selling". More than half con- 


vinced that Wall Street was antagonistic to his pro- 
gram, he lent a willing ear to Congress when it suggested 
that the short interest in the market was retarding re- 
covery and approved a committee investigation of short- 
selling practises. The inquiry got under way with a good 
deal of fanfare but uncovered nothing of moment and 
when it turned its attention to the manipulations on the 
"long" side which had led up to the break Hoover speed- 
ily lost interest and it was not long before the investiga- 
tion was called off. 

Doubtless there was a large short interest in the mar- 
ket during the early part of 1931, as there has been at 
various times since, but "bear" operations have had lit- 
tle effect on the course of the depression. The seeds of 
the condition in which the country found itself were 
sown far back during the era of credit inflation which 
set the seal of doom on lasting prosperity. That the 
President failed to recognize this fact is proof either of 
his lack of understanding of the economic forces at work 
or of wilful refusal to admit the facts. 

But the do-nothing policy to which the Administra- 
tion was committed now came face up against world 
events which called for decision and action, for the Cen- 
tral Powers were again in serious financial trouble. 
Deprived of the aid which they were in the habit of 
getting from abroad, they faced a crisis which resulted 
in the suspension of the Credit Anstalt Bank of Austria 
and left Germany on the brink of disaster. Further rep- 
arations payments were out of the question and this 
meant in turn a suspension of payments on allied debts. 
Something had to be done and President Hoover did the 
only thing possible under the circumstances. He pro- 
posed a moratorium of one year on all international 


But the logical and wary French people were not 
ready to accept this boon to their German neighbors 
without question or reservation. They played for delay. 
They haggled and bargained and when an accord was 
finally reached after some weeks of discussion the meas- 
ure had lost much of its psychological effect. The bloom 
was off the peach. The movement had lost its impetus 
and straightway the market headed into another de- 
cline. This time it was to be a real u bear" market carry- 
ing downward with the averages all hope of immediate 
recovery. The big "shorts" went short again and it was 
said that the Percy Rockefeller and Danforth interests 
cleaned up tens, if not hundreds, of millions, while all 
the indices of trade hit new lows. Mr. Hoover was 
shocked and resentful. Again he was paralysed into a 
state of inaction and in this condition the first phase of 
the depression came to an end. 

But, by this time the Fall of 1931 there was no 
longer doubt that the country was in the throes of de- 
pression, and such an one as had never been encountered 
before in all experience. Even Mr. Hoover was ready 
to admit this fact. Prosperity was no longer "just around 
the corner". 


IF THE initial stage of the depression may be charac- 
terized as a period of Hope Deferred its later phase 
may be rightly called a period of Black Despair. For at 
last it was realized, even in Washington, that we were 
in the grip of a business and financial crisis which had 
never been equalled in severity within the memory of 
living men. 

Trouble started abroad and at first England bore the 
brunt of it. Heavily involved in credits to the Central 
Powers British bankers faced a devastating loss when 
Germany and Austria collapsed. As was to be expected, 
there was a rush for gold and heavy withdrawals from 
this country followed. France was less severely involved 
but as a precautionary measure likewise began to call 
her gold back and the same movement had been under 
way in the Central Powers since the beginning of 1931, 
when the first signs of stormy weather appeared. Up to 
May 1 the Federal Reserve System had lost some five 
hundred millions in gold to foreign countries and 
later President Hoover issued a campaign statement to 
the effect that we had been within two weeks of going 
off the gold standard, but Senator Carter Glass ques- 
tioned the accuracy of this statement and quoted figures 



which made it appear that the president's assertion was 
little more than a political scarecrow. 

But, difficult as our own position was, that of England 
was growing desperate. In August American bankers 
joined with international bankers in extending a credit 
of $400,000,000 to England but it did little good and 
before the following month had ended England aban- 
doned the gold standard. This was the first serious break 
in the solid gold front since the stabilization of curren- 
cies after the war and it had serious repercussions over 
here. With his back to the wall the President decided 
that something had to be done. He called a conference 
of bankers at the White House which brought forth a 
proposal to establish a $500,000,000 national credit in- 
stitution for the purpose of rediscounting frozen bank 
assets. The plan met with general approval and the 
National Credit Corporation was launched in October, 
but the corporation was essentially an emergency insti- 
tution and it was superseded by the Reconstruction 
Finance Corporation shortly after the first of the year. 

In the meantime, apparently despairing of help from 
the administration, the railroad interests decided to set 
up a credit agency of their own, with $100,000,000 to 
$125,000,000 capital, for the purpose of extending 
loans to the weaker roads against increased revenues to 
be derived from higher freight rates sanctioned by the 
Interstate Commerce Commission. This was done in 
December but its functions likewise were soon to be 
taken over by the Reconstruction Finance Corporation. 

This institution, alphabetically known as RFC, un- 
doubtedly represented the supreme effort of the Hoo- 
ver administration to check the depression. Originally 
conceived as an emergency measure, it has grown stead- 
ily in importance and practically all subsequent efforts 


to alleviate conditions, whether emanating from Presi- 
dent Hoover or his successor, have made liberal de- 
mands upon this agency. As set up in the first place the 
capital of the corporation was established at $500,000,- 
000, to be subscribed by the government, with authoriza- 
tion to issue debentures to the extent of three times its 
capital, but this was later increased by amendment to 
six and three-fifths times its capital, giving total avail- 
able resources of $3,800,000,000. As of December 31, 
1933, practically the whole amount was in use. 

The purposes of the Reconstruction Finance Corpora- 
tion were broad. It was authorized to aid in financing 
agriculture, commerce and industry but under the Hoo- 
ver influence its resources were employed largely to 
bolster up banks, insurance companies, and railroads, 
which of course felt the effects of the depression in full 
measure. That the corporation was not conducted en- 
tirely without an eye to partisan advantage appeared 
when it was disclosed that Charles G. Dawes, vice-presi- 
dent under Coolidge and presiding genius in the affairs 
of the Continental and Illinois Bank and Trust Com- 
pany, of Chicago, succeeded in getting ninety million 
dollars on a hurry call, but the loan was undoubtedly 
justified since it was the only means of averting failures 
which would have severely shaken the entire banking 
structure of the Middle West. 

The early months of 1932 were critical. It was during 
this period that the gold drain was felt in all its severity, 
resulting in a steady decrease in bank deposits and the 
enforced closing of many banks despite the help ren- 
dered by the RFC. Naturally this affected confidence 
and hoarding appeared on a broad scale. At its peak 
the President estimated that it exceeded $1,600,000,- 


000 and to this more than to foreign withdrawals was 
due the steadily weakening condition of the banks. 

All in all, the President's seat was not comfortable 
during these eventful days. With economic disaster 
threatening he was subjected to constant sniping from 
Congress which, as a typical gesture, in January passed 
a tariff bill that left the rates practically unchanged but 
stripped the President of his powers under the flexible 
provisions of the original act. Mr. Hoover did not take 
kindly to this treatment and by retaliation or ill temper 
steadily managed to build up the grudge against him 
existing in the legislative branch. Hostilities were sus- 
pended long enough, however, to pass the Glass-Steagall 
Bill, which expanded the credit base substantially and 
made about $750,000,000 of the Reserve System gold 
supply available for other purposes. 

In an apparent effort to keep itself in the limelight 
the Senate during April started its now famous Wall 
Street investigation and out of its first witness, Matthew 
C. Brush, drew the obvious but nonetheless startling 
admission that "no one was in Wall Street for his 
health", to be followed by the equally sensational ob- 
servation that some of its activities were a "racket that 
made Al Capone look like a piker". 

But the political tide was rising and Hoover was soon 
to be engulfed in a struggle for his political life. Un- 
fortunately for him this effort was to be staged against 
an unsympathetic background, for as a prelude the 
President had to face a disconcerting situation growing 
out of the arrival of the Bonus Army in Washington. It 
afforded opportunities to make capital political mistakes 
and Hoover overlooked none of them. Aside from the 
tragic events resulting in the shooting of two members 
of the Bonus forces the entire affair has assumed a cer- 

tain aspect of sardonic humor, for it appeared to be a 
visitation of Fate upon the President. Peculiarly gifted 
in the capacity to do the wrong thing at the right time, 
he was doomed in his handling of this delicate situation 
from the moment that the first rag-tail members of the 
Bonus Army straggled into Washington. 

The Bonus question had plagued Mr. Hoover since 
the beginning of his administration. It originated in an 
act of Congress, adopted in the mood of fervor that 
swept over the country in the days when the troops were 
returning from over-seas, which authorized the issuance 
of a bonus to ex-soldiers in the form of certificates pay- 
able in 1945. Partly on account of economic distress and 
partly on account of a loose moral argument to the 
effect that the soldiers had been underpaid in compar- 
ison with the compensation of labor during the war, a 
demand for the immediate payment of these certificates 
either in whole or in part had arisen. In 1930 the ques- 
tion was settled by an act permitting the holders to bor- 
row against the certificates up to half the amount of 
their face value. The President vetoed the bill but it 
was passed over his veto and a billion dollars, more or 
less, was paid out, without having, it may be said in 
passing, any visible effect on the depression. Now the 
ex-soldiers began to clamor for the balance and scat- 
tered groups set out for Washington to back up their 
demands in person. In April an advance guard of a 
thousand men arrived bearing a monster petition signed, 
they said, by some two millions "back home." The 
President refused to receive them but many congress- 
men gave ear. After all, the ex-service men had votes 
and their friends and relatives had votes, so what could 
a congressman do ? The President got wind of what was 


going on and issued a blast condemning the activities of 
the men. 

"The government cannot be dictated to by organized 
minorities", he said wrathfully. "I know these actions 
do not reflect the will of the country and I refuse to be- 
lieve that the will of the country is unable to reflect itself 
in legislation." 

Doubtless Mr. Hoover was right, but he chose a poor 
way and a poor time to express himself. Congress sub- 
mitted but the ex-soldiers came on. As the weather 
warmed up ex-service men headed toward Washington 
in growing numbers. Their jobs gone, their homes 
broken up in many cases, there was nothing to hold them 
back. Without any very definite notion of what it was all 
about, they came all the way from the coast, by automo- 
bile caravans, freight cars and plain hitch-hiking, pick- 
ing up recruits as they went. The main contingent arriv- 
ing in Washington some 2,600 strong, a commander was 
found in the person of Walter W. Waters, hot-headed 
and outspoken but not a revolutionary "Hot Waters" 
he came to be known. The Army settled down in Ana- 
costia Park, with the exception of the executive heads 
and some hundreds of personal followers who found 
quarters in an area of Pennsylvania Avenue where the 
buildings had been demolished to make room for a 
projected Treasury structure. Waters imposed strict 
discipline and the men liked it. It took them back to 
Army days. There was no violence or disorder and the 
Washington police had little to do. But the presence of 
the Bonus forces was too much for Congress. It dug up 
the Bonus Bill again. After less than the usual debate the 
House passed the bill; the Senate killed it. But the 
Army stayed on. 

Up to this time the President had affected to ignore 


their presence but now he instigated a movement in Con- 
gress to get the men out of Washington by offering to 
pay their way home, the cost of transportation to be 
charged against their bonus certificates. Some accepted 
and the army dwindled from a peak of 10,000 to about 
6,000. Growing desperate as Congress adjourned, a 
body of men started down Pennsylvania Avenue to 
picket the White House. The police drove them back 
and two men were killed in a bloody riot. Fearing more 
trouble, the police in the last days of July called on the 
military authorities, who proceeded with a full comple- 
ment of tanks, artillery and tear-gas bombs, first to clear 
out the Pennsylvania Avenue headquarters and then to 
drive the rest of the army out of its camp. 

Thus far the President had managed to keep fairly 
well in the background. Now he suddenly took command 
of the situation and in an ill-advised effort to discredit 
the Bonus forces he called upon Attorney-General Mit- 
chell to justify the government's action. All too promptly 
Mitchell rendered a report to the effect that most of the 
men were "criminals and radicals", but when the real 
facts came to light it appeared that there were few 
radicals among them and their "crimes" were largely 
restricted to traffic violations and other petty offenses. 
The effect was to make both Mr. Hoover and his attor- 
ney-general look ridiculous and the country gained a 
new sense of the President's incapacity to handle a deli- 
cate situation and of his inherent lack of sympathy with 
the victims of economic distress. In itself the Bonus 
Army affair had little bearing on the course of the de- 
pression but its political effect was considerable and it 
served to weight the scales still further against the 

The remaining months of 1932 were given over 


largely to politics. The President made his campaign 
for reelection and was defeated, the palm going to 
Franklin D. Roosevelt. In the traditional manner the 
months intervening between the election and the in- 
auguration were a waiting period. Little was attempted; 
nothing was done, but economic forces moved on relent- 
lessly. Liquidation continued, the strength of the bank- 
ing structure was constantly undermined and weakened. 
All told during 1932, 2,430 banks closed their doors, 
with deposits in excess of a billion and three-quarter dol- 

In reactionary circles it is becoming the habit to say 
that the depression reached its low point and recovery 
set in about the middle of 1932, but to anyone whose 
memory runs back to this period there seems little 
ground for this assertion. It bears all the earmarks of 
propaganda. On the contrary the weight of evidence 
indicates that the low point was not reached until the 
bank crisis which ushered in the new administration and 
it was an open question whether recovery had actually 
set in a year later. The closing months of 1932 were 
months of deep depression. All the indices of trade were 
off. Fear reigned. It seemed that the worst was still to 
come as indeed it was. 

To one who seeks to gain a "close-up" of the depres- 
sion as it had proceeded to this point, it is interesting to 
summarize a survey of a typical community as reported 
by the Committee of the Nation. The community in 
question was a middlewestern city of 100,000 popula- 
tion, industrious, thrifty, home-loving people. In addi- 
tion to the usual complement of small concerns it boasted 
a big automobile plant and an automobile accessories 
industry, an agricultural implement plant, and overall, 
clothing and sewing machine factories. It was a busy, 


hustling town, with seventeen local banks and nine 
building and loan associations, all of which were lib- 
erally conducted. 

The community got an advance taste of the depres- 
sion following a let-down in the operations of the farm 
implement plant starting early in 1929 and growing 
out of declining agricultural prices which directly af- 
fected sales in this field. The payroll of this plant was 
reduced from 3,000 to 300 workers and as a result be- 
fore the end of the year deposits in the city's banks had 
dropped around five million dollars. 

After the turn of the year withdrawals continued as 
business in other lines fell off and the banks were forced 
to begin liquidation of assets in a bad market. In the 
case of one small bank deposits were reduced from $1,- 
700,000 to $700,000, calling for drastic liquidation at 
a heavy sacrifice. This was repeated in other instances 
and finally in order to save the situation one of the 
larger banks took over a group of smaller institutions. 

By the beginning of 1931 rents had shrunk to less 
than half their former levels and real estate was a drug 
on the market. Mortgages were defaulted and building 
and loan contracts surrendered on every hand, the home 
owners losing their equities. 

As unemployment mounted depositors continued to 
withdraw their funds in order to meet living expenses 
and the larger banks began to feel the drain. The largest 
national bank had pursued an aggressive lending policy 
and now it began to find it difficult to collect its loans. 
In previous times it had been accorded liberal treatment 
by the bank examiners but suddenly this policy was re- 
versed and the examiners threw out some hundreds of 
thousands of dollars of loans which the bank considered 
good. From a position of $1,200,000 in the black its 


condition was changed almost overnight to $1,000,000 
in the red and the examiners called upon the manage- 
ment to make up the deficit. The president killed himself. 

This unfortunate event was all that was needed to 
touch off the powder barrel. A run started and the bank 
closed its doors. The epidemic of suspicion spread and 
the largest State bank also went into liquidation. Being 
the depository of more than half the downtown stores, 
this failure slowed up all business in the community. By 
October only four banks remained open on an unre- 
stricted basis. Followed now a drive for the liquidation 
of loans by the Federal Reserve Bank of the district. 
The member banks applied to the RFC for help but 
found that they could get it only on a ruinous basis. In 
the meantime the seepage of deposits continued, hoard- 
ing became general and finally, in January, 1933, a 
neighboring state declared a banking holiday and the 
local banks were caught with large quantities of uncol- 
lected checks drawn on banks in other states. Within 
three weeks the second largest bank in the city lost 56% 
of its deposits and two other banks failed. At this point 
in order to save the remaining banks the Mayor of the 
city declared a moratorium, which was not dissolved 
until the President took action. 

At the last bank call a community which had had 55 
millions in deposits to rely upon found itself with only 
six millions left and one and a half million of that was 
unavailable for credit purposes as it was in the form of 
"new deposits'* which the banks accepted for "safe- 
keeping" only. 

Summing up the results, this survey concludes : 

"Bad as is the economic situation, what has happened 
is worse than losing money. Confidence has been de- 
stroyed, and with it ambition, hope and inestimable 


human values. Worst of all, people's pride has been 
taken from them. One of the established principles of 
social relief work is to help a family to work out a re- 
organization. No matter how poor a family's circum- 
stances in normal times, there is usually some plan for 
the future. When you ask people now about their plan, 
the older ones stare at you blankly or return a cynical 
laugh. They have none. The younger generation simply 
sneer: 'Why save? Why plan? See what happened to 

"Respect for thrift, inculcated by years of education, 
has been largely destroyed. Children who lost their 
savings in banks lost faith in our institutions. The home- 
owning ambition has been shattered. All of this disaster 
and suffering has bred the philosophy: 'Eat, drink and 
be merry, for tomorrow we shall probably be broke'. 

* * * * 

"Nearly every employer and merchant is a bank 
stockholder. The weaker ones have been ruined by the 
slow disintegration of business. Ninety per cent of them 
will be bankrupted by bank stock assessments. With 
the leadership of the community thus impaired and help- 
less, only the large percentage of home ownership pro- 
vides a safeguard against destructive radicalism. The 
city has experienced one menacing communist demon- 
stration. Unemployment, loss of deposits and homes, 
have created a feeling of hopelessness that could easily 
be turned to desperation by radical agitation or dema- 
gogic appeals to mob psychology suggesting to labor that 
it has been mistreated. 

* * * * 

"In a community of homes and home ownership, real 
estate is no longer an asset; it has become a liability. 


"Twelve hundred families have doubled up. Vacan- 
cies approximate the same number, showing that the 
community was not over built. 

* * * * 

"With no appreciable decline in population, births 
were reduced from 2,500 in 1924 to 1,500 in 1932. 

* * * * 

"All private educational and charitable institutions 
have been crippled by having their funds frozen in 
closed banks, or through default of interest on invest- 
ments in local mortgages and securities. 

* * * * 

"The local University, largest boarding school in 
America, formerly had 3,000 attendance and as many 
more on waiting list. This year's attendance is 2,500. 

* * * * 

"Master bedrooms in one of the finest mansions in 
the city are rented to paying guests at $4 a week. Many 
formerly wealthy or well-to-do families take lodgers at 
$2.50 a week. 

* * * * 

"At the peak of the unemployment 9,400 families 
(average 4j/s persons per family) were on the relief 
rolls within the county. Including those cared for in 
private institutions and by personal charity, well over 
40,000, or 25 % of the entire population, were receiving 
assistance. The relief administration estimated that 
40% to 50% of those receiving assistance had money in 
closed banks or building and loan associations. 

* * * * 

"Poor Relief Tax Levy: 1929-301 cent 

1930-31 3^ c 
1931_32_ 2iy 2 c 
1932-33 17c 

"Pay envelopes at the peak of prosperity held upward 
of three million dollars every month. Now the monthly 
payroll is less than $500,000. 

* * * * 

"Postal Receipts: $971,000 in 1928, $675,000 in 
1933. For September 1933 they were 11.23% below 
September, 1932. 

* * * * 

"Three large modern hotels, formerly well filled and 
prosperous, are all in control of creditors' committees; 
not one paying its bond interest ; gross receipts cut in two. 

* * * * 

"A modern downtown office building in the best loca- 
tion, free of mortgage, for which the owner was offered 
$450,000, is now renting on a percentage basis; gross 
income fails by $2,000 a year to meet the taxes. 

* * * * 

"Two stores which rented for $750 and $600 a 
month bring $100 each; owner unable to pay the taxes. 

* * * * 

Tax Delinquency: For county and city, July 1, 1933 
$1,159,000; will be increased (estimated) to $2,- 
525,000 by end of 1933. 

* * * * 

"Bank Deposits: (millions of dollars) 













$32 1/3 








Building & loan 

* Of these $20 million in bank deposits only $4^2 million were 
available as unrestricted bank circulating medium. 


WITH the coming of Roosevelt the era of inaction 
came to an end. Embodying a ringing pledge of imme- 
diate action in his inaugural address, the new president 
committed himself without reservation to a decisive 
effort to end the depression. Just what form this action 
was to take in all probability was unknown to him when 
he gave his pledge but events quickly decided his im- 
mediate course. 

At the moment that President Roosevelt stepped 
into the White House in fact, while he was still de- 
livering his address from the Capitol steps the bank- 
ing system was going into collapse. The sound was in 
every ear. Finding their banks unable to meet the de- 
mands for withdrawals, the States of Michigan and 
Maryland had declared a "banking holiday." Five other 
states were prepared to follow their lead. During the 
last thirty days of the Hoover tenure of office 241 banks, 
state and national, had closed their doors and since the 
first of January 389 banks with total deposits of almost 
a quarter of a billion. Notwithstanding generous aid 
from the Federal Reserve and RFC authorities, it was 
evident that the entire system was on the verge of dis- 
ruption and the resulting economic dislocation was fear- 
ful to contemplate. As it was, cash was rapidly going 



into hiding. Everywhere banks refused to accept checks 
drawn on banks in states protected by the banking holi- 
day. Fearing similar action by other states and doubting 
the soundness of their fellow institutions, all banks be- 
gan to accept checks for collection only. In states where 
the holiday existed business concerns were unable to 
obtain funds for payrolls, debtors were unable to secure 
cash with which to meet their obligations. Employees 
were without the means to take care of their immediate 
needs. Rents and grocers' bills went unpaid. Except 
where credit was extended householders went without 
food or other supplies. A few more days and chaos 
would have been upon us. Then the President took the 
first step to redeem his pledge of action. At eleven 
o'clock on the night of March 5, his second day in office, 
he declared a national banking holiday of four days, 
subsequently extended, and coupled this with a prac- 
tical program for the prompt relief of the banking situa- 
tion. The response was immediate. There was new hope. 
Realizing that at the head of the government was a man 
who was willing to do something, or at least to try to do 
something, courage oozed back, confidence began to 

As the days passed it became evident that construc- 
tive steps were being taken. In rapid succession Presi- 
dent Roosevelt urged upon Congress and obtained the 
adoption of the following measures : 

1 The Economy Bill, which reduced the govern- 
ment's expenses some half billion dollars and gave the 
President considerable latitude in dealing with the vex- 
ing matter of veterans' allowances and compensations. 

2 The Agricultural Adjustment Act, designed to 
prevent over-production and increase the prices of farm 
products by placing a processing tax on various com- 


modities wheat, cotton, corn, hogs, rice, tobacco and 
milk products and passing the proceeds along to 
farmers who agreed to curtail production. 

3 The Securities Act, a reform measure intended, 
in the President's words, "to correct some of the evils 
which have been so glaringly revealed in the private 
exploitation of the public's money". 

4 The Farm Mortgage Act, providing for refinanc- 
ing farm mortgages at lower rates of interest. 

5 The Home Owner's Loan Act, extending to city 
real estate as well as rural property the benefit of lower 
interest rates on mortgages. 

6 The Banking Act, reforming banking practises in 
many important respects, including the abolishment of 
security affiliates, segregating the functions of invest- 
ment banking from those of commercial banking and 
establishing a guarantee of bank deposits up to an 
amount of $2,500 only, to begin with, but increasing 
substantially later. 

With the exception of the Agricultural Adjustment 
Act these were essentially measures either of relief or 
reform and they did not strike at the heart of the de- 
pression, but the President and his advisers were evi- 
dently marking time in this direction merely in order to 
formulate their ideas, for as soon as these measures 
were out of the way President Roosevelt was ready to 
tackle the larger problem. 

Apparently in order to lay a broad basis for con- 
structive measures the President attacked first the fun- 
damental problem of deflation and he attacked it from 
the standpoint of the money question. He suspended 
the gold standard, which was blamed in no little part 
for the existing maladjustment between prices and debts. 
This had been done successfully in other countries, 


notably in Great Britain, which was already beginning 
to feel the good effects of dropping gold, as it did in 
September, 1931. If the dollar were permitted to de- 
preciate in terms of gold, it was argued, higher prices 
would be obtained for the things that the dollar bought 
sound enough in theory but, according to the old 
school of economists, dangerous in practise. At all events 
the gold standard was suspended, not to be restored un- 
til some eight or nine months later when the dollar re- 
appeared shorn of 40% of its gold content. In the mean- 
time prices had risen and fallen and risen again, resting 
at the time of stabilization somewhere around 16% 
above where they were when we went off gold. But it is 
too early to say what the ultimate effect will be. 

Legislators seem to be born inflationists, for no 
sooner had the President got the gold question disposed 
of than Congress adopted a measure of its own that 
went the President one better. It was in the form of an 
amendment, known as the Thomas Amendment, which 
was attached as a rider to the Farm Bill and it gave the 
President power ( 1 ) to provide for credit expansion by 
arranging for the purchase of $3,000,000,000 of gov- 
ernment bonds by the Federal Reserve Banks, (2) to 
issue the same amount in greenbacks, (3) to authorize 
the unlimited coinage of silver at a ratio with gold to be 
fixed within his discretion and (4) to reduce the gold 
content of the dollar by not more than 50%. It was to 
this act that the President resorted when he stabilized 
the dollar at 59.06 cents and when he later took action 
to "nationalize" silver. 

Dismissing the money question, for the time being 
at least, and having more or less fruitlessly endeavoured 
to adjust his developing program to world conditions 
through the World Economic Conference, Roosevelt 


turned his attention resolutely to the problem of indus- 
trial recovery. Emerged then a three-point program, of 
which the spearhead was the NRA, whose alphabetical 
cognomen and "blue eagle" symbol have since become 
an ever-present part of industrial organization. In the 
same act which created the NRA was incorporated the 
beginning of a broad program of public works, which 
rested upon the expenditure of some $3,300,000,000. 
Partly aimed at the problem of unemployment this 
measure was also intended to stimulate activity in the 
heavy industries, which in the past invariably have led 
the way out of depression. As the third point in the 
program a substantial expansion of credit was effected 
by authorizing the Reconstruction Finance Corporation 
to invest up to one billion dollars in the preferred stock 
of national banks. Bank credit, public works and the 
NRA were the three forces on which the administration 
determined to rely in its battle against the depression 
and all have since been called into play in constantly 
increasing measure, but the NRA has been the most 
potent and visual factor since its ramifications have ex- 
tended into all branches of industry and have substan- 
tially modified the industrial structure. Broadly speak- 
ing, it has operated to maintain or increase prices on the 
one hand through the control of competition while on 
the other it has been used to increase employment 
through the various codes. Originally designed to pro- 
vide self-regulation of industry by the formulation of 
"codes of fair competition" establishing standards of 
wages and hours and guaranteeing to labor the right to 
"bargain collectively," the program has drifted more 
and more toward government regulation. At the start 
these codes were devised by the industries concerned 
but lack of agreement has forced the federal authorities 


to intervene in many instances with the result that the 
government now dominates the situation. By the end of 
1933 it was estimated that practically 90% of all em- 
ployers in the country were enrolled under the "blue 

The end of the President's first year in office un- 
doubtedly found the country well advanced in the com- 
mon effort to end the depression. During this period 
commodity prices had advanced about 20%. Deflation 
had been halted. Business was on the upgrade. But the 
problem of industrial unemployment still existed, 
though in lesser degree. A determined effort had been 
made to meet this situation through the Civil Works 
Administration, which was an outgrowth of the Public 
Works Administration and expended some 400 million 
dollars in direct employment on civil projects. Much of 
this work served no useful purpose and on the whole 
it was inefficiently done, but employment was given to 
four million persons or more and this has tended to 
build up purchasing power and so to stimulate trade. 
It is the expectation of the Administration that this 
work will be gradually eliminated; in fact, much of it 
has ended and it is hoped that this labor will be absorbed 
either in public works or by industry in the natural 
process of recovery. 

Whether this occurs remains to be seen but in the 
meantime it may be noted that at the end of the first 
quarter of the President's second year, as of June 30, 
1934, progress toward recovery was reported by 
Donald R. Richberg, Secretary of the National Emer- 
gency Council, as follows : 

40,180,000 persons were employed, an increase of 
4,120,000 over March 1933, and of 2,320,000 over 
June, 1933. 


Total manufacturing wages had increased from $96,- 
000,000 a week in the above period to $132,000,000, 
or 37.5 per cent. 

The average work week in industry had been reduced 
six hours and the average hourly earnings had been 
increased about 26 per cent. 

Living costs had increased 9.6 per cent from June, 

1933, to June, 1934, leaving a net increase of 25 per 
cent in the purchasing power of wage-earners. 

Net profits of 506 corporations of all types had risen 
from $157,579,000 in the first half of 1933 to $408,- 
572,000 in the first half of 1934. Net profits of 402 
industrial companies had risen 600 per cent in the same 

Business failures in the period February to May, 

1934, were more than 40 per cent lower than in 1929. 
In summarizing the events of this epochal period it is 

impossible to ignore the repeal of prohibition, which 
was an essential part of the Roosevelt program. Raised 
to the dignity of a major issue during the campaign, 
Congress anticipated his purpose by repealing the Eight- 
eenth Amendment at the "lame duck" session in De- 
cember, 1 932, but it did so entirely under the spur of his 
prodding. By December 5 of the following year Repeal 
had been ratified by the thirty-sixth state, Utah, thus, 
with minor modifications, restoring the liquor question 
to the status that it had before January 1, 1920, and 
reestablishing an industry that has had a considerable 
part in bringing about such recovery as may be noted to 

So much for the credit side of the ledger. As the first 
year of the New Deal came to an end and the President 
departed for the Summer White House at Hyde Park, 
New York, it was obvious that the fundamental prob- 


lem was still unsolved, although some progress had been 
made in this direction. Consumption still lagged and no 
effective means had been found of building up purchas- 
ing power in volume. The dog was still chasing its tail. 
Demand creates production; production creates pur- 
chasing power; purchasing power creates demand. But 
where does the circle start? And who is going to start 
it? The President says we will spend or give until pur- 
chasing power is built up and from that point things will 
right themselves. Perhaps so. But what of the cost? 
Already a mountain of debt has been placed upon the 
backs of future generations some ten billions, accord- 
ing to current estimates. What if this vast program of 
expenditures is ineffective and other billions must be 
found to carry the effort through to a successful con- 
clusion? Where are they coming from? If the plan 
works, it is argued, this question will take care of itself. 
If these billions are poured into the hands of the public, 
if they are not absorbed in the liquidation of past debts, 
if confidence is restored and the beneficiaries of govern- 
ment largess turn their bounties back into the channels 
of trade, if this money is spent and not hoarded, con- 
sumption will increase, factories will resume operations 
on a normal scale, employment will return to former 
levels, profits will accumulate and from these various 
sources the funds will become available to pay off this 
mortgage on the future or, if need be, to expand the 
process into broader fields. 

True enough, but the "ifs" loom large. And if the 
plan fails the only alternative is vast social changes and 
a lowered standard of living for generations to come. 


THAT A VAST CHANGE has come over the Amer- 
ican scene is evident to the most casual observer. The old 
America is no more. The America of endless resources 
and boundless opportunities, where wilful men took 
what they wanted and weak men footed the bill, came 
to an end with the crash of 1929. Doubtless it was al- 
ready fated to end, and the new order was even then 
in the making but, inevitable as it was, its emergence 
has brought with it doubts and perplexities. Where will 
this new order lead? Does the collapse of the old order 
signify merely the end of an era or is it the break-down 
of a system? 

For a hundred years or more the country has pursued 
a policy of rugged individualism. We have accepted the 
Profits System in its entirety and it has been treason to 
question its beneficence.To those who have contended 
that the system would lead only to ruin we have turned 
a deaf ear. In place of arguments we have countered 
with epithets. Socialists, communists, "crackpots" have 
been the least of these. But at the long last we have had 
to face the hard fact that the system has ceased to func- 
tion, that it has led us into a morass from which there 
seems to be no escape save through the adoption of a 



different system or economic philosophy. How far will 
the new order depart from established principles? 

If existing tendencies have any significance it is pos- 
sible to draw these conclusions : 

1 There is a levelling process at work which prom- 
ises to act as an effective brake on individualism and is 
likely to bring about a substantial redistribution of 
wealth in the future. 

2 In so far as possible the element of chance is to 
be eliminated in all our relationships. In place of a "hit- 
or-miss" economic system we are developing a planned 
society in which production and consumption will be 
more evenly balanced. 

3 As a corollary this carries with it the idea of a 
regimentation of many industrial activities, along with 
which goes a ban on all forms of speculation, including 
margin trading and trading in commodity futures. 

4 Mass production is to be brought under control, 
to a point at least where it will not upset economic 

5 The "underdog" is to get a better "break". 

Up to this point it is a fact that the changes imposed 
upon the system have been largely in recognition of 
shifting moral values. Essentially the New Deal is a 
"Square Deal", but there is an economic undertone 
which is swelling in volume. Gradually there is develop- 
ing a realization that it may not be impossible to trace 
our economic ills, in great part if not entirely, to a sys- 
tem that placed a premium on mass production. That 
the machine produces goods in greater volume than it 
creates purchasing power to absorb is not open to ques- 
tion and the constant piling up of mass production on 
the one hand coupled with a whittling down of purchas- 
ing power on the other has had much to do with the 


economic impasse that exists today. As a whole the 
world is geared up to produce more goods than it can 
consume and it is not a simple matter to find a formula 
that will correct this lack of balance. 

Off hand it may be argued that the solution lies in 
building up purchasing power through decreasing the 
hours of labor without diminishing pay. But this will 
add to costs and if prices increase the main object is 
defeated. The increased cost of production has to come 
out somewhere along the line and the trend seems to be 
to take it out of profits. Doubtless capital received more 
than its just share of profits during the post-war era and 
it is likely now to face a period of diminishing returns. 
It is quite possible that the pendulum will swing back too 
far and that injustice will be done, but that is not in- 
frequently the fate of those who have sought to profit 
at the expense of others. 

In a broader sense, however, the tendency is to bring 
about a correction of inequalities which have hampered 
the weak and small and put a premium on power and 
ruthlessness. The conditions that enabled two per cent 
of the population and by no means the most deserving 
two per cent to acquire control of eighty per cent of 
the nation's wealth are approaching an end and to this 
extent reform is in the saddle. As Secretary Ickes put it 
not long since : 

"We used to brag of American prosperity. We can 
have no prosperity while American women slave in sweat 
shops and American children grow up in squalor and 
American men are prey to the whims of an industrial 
system that runs wild. We should be ashamed of a pros- 
perity like that. We shall not have the real thing until 
we adopt the new set of political concepts which are now 


taking form after the collapse of the old set and the 
misery of millions of people. 

"That is going to be a hard thing for us to do. We 
are individualists by long inheritance. We won't give up 
our right of individual action and our tradition of in- 
dependence. We resent regimentation and collectivism, 
and properly so. But the time has come for us to make 
the discovery that the highest manifestation of intelli- 
gent individualism is willingness to co-operate with our 
fellow citizens for the common good. We can so co-op- 
erate, if we will, and still be a free people we can be 
freer than ever before; the freest people that ever 
lived. We now have our chance. How long our chance 
will last is a question. 

"It will mean surrendering something for the sake of 
gaining a benefit which we have never had in the past; 
a larger benefit than we can ever gain in the old way of 
'every man for himself and the devil take the hindmost'. 
It will mean recognizing, as a people, the iron truth that 
no one of us can be secure unless security extends to the 
least member of the community." 

To say that this is revolution is inexact. It may lead 
to revolution and whether President Roosevelt will be 
its Lenin or its Kerensky is beside the question. In plain 
fact, he will probably be neither but is likely to finish his 
task and pass on the baton of leadership to other hands. 
Whose hands? you will ask. Well, Wallace, for one 
Henry A. Wallace. He is young, able and ambitious. He 
has ideas, imagination and a sense of humor; his feet 
are on the ground and, as the chief dispenser of the 
dole to a vast section of the populace, he will inherit 

But, ignoring such speculations, interesting as they 
are, one thing is certain We are still in a period of 


transition. The end is not yet and no man can foretell 
with definiteness the final direction that events will take. 
True, there are many who are ready to point the way. 
"Back to the old order", says the reactionary. "Let us 
hold fast to established principles", says the conserva- 
tive, while the radical looks to revolution and the poli- 
tician to his job. But the politician and the reactionary 
are both losing caste. They belong to the predatory 
classes and the people know them. The real struggle 
lies between the radical and the conservative, or shall 
we say? between the liberal and the conservative, for 
the issue is not so likely to be between the "Haves" and 
the "Have-nots" as between the "Gives" and the "Give- 
nots". At all events it looks as if the under-dog is due 
for something more than a "break" and that something 
is coming out of someone's pocket. Naturally the some- 
one in question is not going to like it and they will have 
to fight it out, as has happened so often in the history of 
civilization. In this instance, it is to be hoped and there 
are some reasons to believe the issue will be settled 
in the traditional American way, which is with ballots 
rather than bullets. 

But, look at the situation as you will, it is possible to 
foresee only a bitter political struggle, with the power 
of numbers on one side and some measure of justice on 
both sides. Under such conditions any discussion of in- 
dividual rights or national well-being is academic. By 
the same token economic considerations will figure in 
the turn of events merely as arguments to strengthen the 
case of one side or the other. The form which the new 
order will ultimately take will be determined by the in- 
terests of the greater number or the better organized. 

In these days we hear much of recovery but it is to be 
doubted that this is the only goal, or even the main ob- 


jective, which those who control the course of events 
have in mind. In their larger program there are abun- 
dant signs that reconstruction is placed ahead of recov- 
ery, as it well may be. Certain it is that there would be 
little to gain from recovery itself if it led only to a re- 
turn of the same conditions from which we have suffered 
so grievously. To an extent these identical conditions 
have been legislated out under the New Deal but there 
is no assurance that parallel conditions may not come 
into being within the scope of existing legislation. 

To illustrate: As this is written (late in August, 
1934,) there are some indications that we are on the 
verge of an upswing in business, which may attain the 
proportions of a real "boom". The pump has been 
primed. It is possible that inflation is about to do its 
work. If so, the old familiar forces will again assert 
themselves. Buying will start. Consumption will in- 
crease. Wholesale and retail merchants will begin to 
order ahead. Factories will speed up production. Men 
will go back to work. Profits will accumulate. Money 
will be easy. Confidence will return. As promising as any 
such revival would be, it is to be doubted that it would 
be deep-seated or long-lasting, since the movement 
would be based upon artificial stimulants rather than 
on the natural processes of recovery. At the best it 
would be short-lived, but during its course it should be 
intense enough to end all pretense of emergency and 
with the passing of the emergency the legal basis for 
existing restrictions on production would disappear, 
landing the AAA, NRA and other similar agencies in 
the scrapheap where it is possible they are headed in 
any event. In the absence of these deterrents it is likely 
that we should witness a repetition of the post-war 
"boom" of 1919. Inflamed by mounting prices, farmers 


and manufacturers alike would step up production 
rapidly, thereby absorbing large numbers of the unem- 
ployed but not all, by any means, since it is doubtful 
that the heavy industries would be affected or that ex- 
port demand would develop in volume, and these are 
factors that have a definite bearing on employment. But, 
even after making such allowances, there would still be 
a substantial gain; purchasing power would increase, 
corporate profits and dividend disbursements would be 
large and, if the parallel runs true, would be diverted 
into speculation in one form or another. Under existing 
restrictions it is possible that stock market operations 
would be kept under control but this would not apply to 
commodities or real estate. There would be land booms, 
reminiscent of the Florida land craze, and commodity 
prices should go sky-high. Rising prices, in turn, should 
further stimulate output in all lines and in the end, after 
the orgy of speculation had spent itself, we should find 
ourselves face to face with the same glut of over-pro- 
duction with which we have had to contend in recent 

At this point it may be well to pause and remind our- 
selves that this is pure hypothesis. Perhaps it were bet- 
ter to say that it is mere guess work. It is quite within 
the scope of possibility that there will be no revival of 
business at this time or, if it comes, it may exhaust itself 
in a stock market spurt, as it did in the Summer of 1933. 
But soon or late, if there is no change in present policies, 
recovery will come and, when it does, it should assume 
something of the aspect that we have outlined here, un- 
less it should take a wil-dly inflationary form, in which 
event the movement would be pyrotechnic in its course 
and the readjustment correspondingly more drastic. 

To thinking men recovery in such form a false pros- 


perity would be worse than no recovery at all. Afford- 
ing opportunities for a few to "clean up" in speculation 
it would leave the masses as deep in the slough as they 
are at this time and the social and political repercussions 
might well be disastrous. Recognizing these dangers, 
forward-looking apostles of the New Era are bending 
their energies toward devising measures that may avoid 
this outcome, even at the sacrifice of speed in recovery. 
That they will succeed is to be doubted, for time and the 
exigencies of politics work against them. To candid ob- 
servers it is difficult to see how the New Order can be 
established in its fulness until at least one more crisis 
has been faced and overcome. 

But, despite this, a virile element in the Roosevelt 
administration is committed to a program of reconstruc- 
tion which is designed to bring about permanent recov- 
ery irrespective of intermediate cyclical movements. In 
doing this their objective is to solve the problem from 
the bottom rather than the top. Lasting recovery, they 
argue, can be attained only through a rebirth of the 
purchasing power of the masses and they have set out 
to accomplish this result by means which have thrown a 
fright into the protagonists of the old order. In their 
eyes the economic structure is a pyramid resting upon 
the farming population at its base and extending up 
through successive strata of laborers, white collar work- 
ers, professional people, investors and managers. To 
attempt to fertilize the lowest strata by infusing a tran- 
sient prosperity into the two topmost layers, they hold, 
is a hopeless task. This is what the "trickle-down-from- 
the-top" school of economists of the Hoover era sought 
to do and they failed. The new school proposes to invert 
the pyramid and let the prosperity of the many at the 
inverted base trickle down to the few at the bottom. 


This is good physics and it may prove to be sound 
economics, but in the process some established notions 
are likely to go by the board. As a part of the process, 
incidentally, it may be necessary to go so far as to find a 
substitute for the Profit motive "Sacred Cow" of the 
old order. With all its boasted achievements, in the last 
analysis, this vaunted incentive to progress has resulted 
only, in the words of the President, in creating a "gen- 
eration of self-seekers" whose greed and recklessness 
have plunged us into disaster. Is there a place for it in 
this New Day?